03 – The history of commissions
The financial planning industry began as the life insurance industry. As a result, the remuneration basis for life insurance advisers – commissions – became the norm for the financial planning industry as it grew through the 1970s, 1980s and 1990s. For life insurance advice, the commission was calculated as a percentage of the premium paid for a given policy. For investment and superannuation advice, the commission was typically calculated as a percentage of the amount being invested.
Commissions have long been targeted by regulators as a problem within the industry. In 2001, substantial disclosure reforms were introduced by the then Howard Government. Amongst other things, these reforms required advisers to accurately declare the amount of commissions that the adviser stood to receive if a client followed the advice that was given.
In 2004, these disclosure rules were extended further to include quasi-commission payments known as ‘soft-dollar’ benefits. Advisers also became obliged to express commission and soft-dollar benefits in whole dollar terms, rather than percentage terms.
Fast forward to 2010 and the Rudd and Gillard governments decided mere disclosure was not enough, and expressly started referring to commissions as ‘conflicted remuneration structures.’ On June 24 of that year (the day before he had a change of boss), the then Minister for Financial Services Chris Bowen had this to say:
the reality is that disclosure of commissions does not deal with the fundamental conflict of interest created by the commission.”
Finance reforms, under the title Future of Financial Advice (FOFA) were duly introduced and, from 1 July 2013, commissions were no longer allowed on new investment or superannuation products.
They remained allowable, and by far the industry standard, for life insurance advice.
In September 2013, Australia’s Federal government again reverted to the coalition, now led by Tony Abbott. At the same time, ASIC commenced targeted research into the life insurance industry. This research was reported in October 2014, via Report 413, Review of Life Insurance Advice. In response, the Financial Services Council and the Association of Financial Advisers instituted a working group, led by John Trowbridge, which culminated in the release of the ‘Review of Life Insurance Advice’ report, more widely known as the ‘Trowbridge Report.’
The Trowbridge Report contained various recommendations, and some of these recommendations lead us to the present situation regarding commissions.