This view was contrary to much of the commentary at the time . That commentary generally suggested that in stopping short of recommending a legislative ban on commissions as ASIC had agitated for in its submission, the PJC’s report was weak on the issue of commissions and provided the financial advice industry with a minimal change or a “business as usual” outcome. We do not see the report this way, not only due to the recommended statutory fiduciary duty, but more significantly due to recommendation 4 in which the PJC recommended:
“that the government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers” (our emphasis).
Two important observations on this recommendation:
Even so, you might ask how will this dramatically alter the financial services industry over the long term, as we suggested in our alert. The answer to that question varies depending upon the lens through which you look at the question. The implications for financial planners, product manufacturers, platform operators and other industry participants are all related and interdependent but different. In this article, we examine the PJC recommendations through one of those lenses - that of platform operators. By platforms we are talking primarily about investor directed portfolio services (eg “wrap accounts”) (IDPS) and IDPS-like schemes and the functionally equivalent products in the superannuation space.
This is a fair question given that the PJC does not specifically mention platforms in its recommendations and they are only mentioned briefly in submissions quoted in the report. One might conclude from this that platforms are not on the PJC’s radar. This may be true to an extent. The complexity, customisation and the web of commercial arrangements involved makes platforms a difficult starting point for regulators. In the UK, platforms were largely ignored in the first wave of reform in this area but are now being considered as part of the Financial Services Authority’s Thematic Review .
The reason to look at platforms is that platforms have become the hub of the retail funds distribution industry, particularly outside of superannuation. For example, ASIC’s submission to the PJC stated that in 2008 approximately 78% of new investment was through platforms . It follows that any meaningful reform in this area cannot ignore platforms. It could be said that platforms are the “elephant in the regulatory room” on the issues covered by the PJC report.
The key issues for platforms in the PJC report arise from:
Neither recommendation is specifically limited to retail clients and so wholesale platforms should also consider the possible impact of the recommendations.
A separate article in this months’ Regulator examines the circumstances in which a financial adviser will owe a fiduciary duty under the general law. From a legal perspective, it concludes that the impact of a statutory fiduciary duty on the content and standard of advice is likely to be minimal. That said, we expect that ASIC would develop policies and raise awareness among financial planners that might drive changes in practice. Further, from the PJC report, we expect that any statutory fiduciary duty would most likely be expressed in language similar to that used in section 601FC(1)(c) which requires responsibility entities of registered managed investment schemes to “act in the best interests of the members and, if there is a conflict between the members’ interests and its own interests, give priority to the members’ interests”. This could, unlike the content of the fiduciary duty under the general law, impose a positive obligation. Such a test and the policy ASIC could be expected to develop in relation to it, is likely to pose a number of issues for platforms:
Given that any changes to adviser remuneration structures are likely to be prospective (for future clients and future inflows), and given the size of inflows into platforms, for any reform in this area to be effective, we expect payments that platform operators make to dealer groups and other intermediaries will need to be considered. On one view, platform operators are product manufacturers (ie they are managed investment schemes) and so under recommendation 4 would have to cease making payments to financial advisers.
This is a complex issue as rather than making payments directly to financial planners, platform operators charge a fee for their service in providing the platform service and may have arrangements with other counterparties such as dealer groups whereby a range of other payments and benefits are conferred. It would be simplistic to conclude that such payments are indirect payments to financial advisers or that dealer groups act as mere conduits for payments to financial advisers. The position is more complex and many dealer groups and other intermediaries have distinct businesses and cannot be regarded properly as conduits for payments from a product manufacturer (such as a platform operator) to a financial adviser.
While the implications for platforms are not clear from the PJC report, we see the report as an accelerant for product and industry changes that are already occurring. For example, platforms that provide the best value equation for clients are likely to be successful in the new environment. Part of this will be to provide sufficient flexibility such that a platform is suitable for the full spectrum of a financial planner’s clients.
We see opportunities for platforms with features that allow advisers to add value and so justify a fee for service (such as managed discretionary account functionality and separately managed accounts). Money already in platforms and inflows should become even more “sticky” in light of these changes, as in the absence of tax and stamp duty rollover relief, in ordinary circumstances it will not be in a client’s interests to transfer their investments from one platform to another.
While a statutory fiduciary duty (and the inevitable regulatory guide containing ASIC’s interpretation of that test) is likely to focus an adviser’s mind on whether a platform is appropriate for each client, we do not see the PJC report as the end of the road for platforms. Far from it, platforms should remain attractive. Platforms provide a solution to the challenges of a fee for service business model by providing a payment mechanism whereby upfront fees for advice may be paid over time in instalments and fees for ongoing advice provided in connection with the platform (recommending switches, executing client instructions and perhaps providing an MDA service) can be paid on an ongoing basis.
There has already been an increase in investors investing through managed fund brokers (ie probably without advisers). There should be a role for platforms which can be accessed directly by investors rather than only through advisers.
In conclusion, while there are likely to be changes to the way in which platforms are currently structured and used, we see opportunities for those platform operators who are prepared to innovate to meet the challenges and exploit the opportunities provided by the move towards a no commissions environment.
 One notable exception was Alan Kohler [Business Spectator article] whose views at the time were similar to the authors.
 See our previous article on Treasury’s views put to the PJC in its submission [Regulator October 2009]
 FSA Thematic Review
 See paragraph 418 of ASIC’s submission to the PJC.
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