The whole messy business of institutionalised churning reminds me of the wise words of George Bernard Shaw: “A government that robs Peter to pay Paul can always depend on the support of Paul.”
We have often in the past questioned the practice of incentive-driven churning. The article titled Incentive-Driven Miss-selling, published in June this year, stated:
The practice of incentivising independent financial advisors to shift their investment and risk books is possibly the single biggest driver of churning, and is likely to be addressed as part of the review of retail distribution.
The Registrar intends to prohibit this practice as a matter of urgency, rather than wait for the RDR process.
“Sign-on incentives” are viewed by the Regulator as “…a major potential driver of incentive-driven churning of financial products for as long as the current distribution landscape and related remuneration models are in place.”
The FSB issued a discussion document on 1 September 2014, but only allows two weeks for responses from the industry in view of the scale of the problem, and to prevent further escalation during the discussion period.
In addition, the Registrar intends to “…continue to review sign-on bonus arrangements that have been entered into and will take appropriate regulatory action where this has resulted in evidence of incentive-driven churn.”
Section 3A of the General Code of Conduct will be amended by the addition of the following subsection:
“A provider or representative may not directly or indirectly, through a third party or otherwise, offer to or receive a sign-on bonus from any person.”
A “sign-on bonus is defined as “…any financial interest offered or received directly or indirectly, with or without conditions —
| (a) | as an incentive to recruit or to become a representative or provider; or | |
| (b) | as compensation for the- | |
| (i) | potential or actual loss of any benefit including any form of income, or part thereof, resulting from any act the result of which is that a person is recruited to or become a representative or provider; or | |
| (ii) | cost associated with the establishment of a provider’s business or operations, including the sourcing of business, relating to the rendering of financial services; or | |
| (c) | in the form of a loan, advance or credit facility and- | |
| (i) | where the utilisation or servicing of that loan, advance or credit facility is linked to the performance of any activity or the meeting of any target or standard relating to the rendering of financial services; or | |
| (ii) | the repayment of the loan or advance is in any manner linked to the termination of any act the result of which was that a person was recruited to or became a representative or provider;” | |
“The proposed amendment supports the consistent delivery of fair outcomes to consumers and ensures that advice is appropriate through explicitly addressing any potential conflicts of interest that may undermine a provider’s duty to act in the best interests of clients.”
The Registrar initially intended to “…address sign-on bonuses as part of the package of reforms to be proposed in the upcoming RDR Discussion Paper. However, due to delays in the finalisation of the RDR and concerns about an escalation in the practice of providers offering to or receiving of sign-on bonuses it was decided to urgently address this practice prior to the release of the RDR Discussion Paper. The comment period is restricted to two weeks in light of the risk of further escalation in the practice during the comment period.”
The Moonstone article referred to above concluded:
A resetting of the moral compass in the financial services industry is long overdue. Putting the interests of clients first, as it used to be, will be a huge step in the right direction.
The proposed steps outlined above indicate that this view is shared by the Registrar.
The whole messy business of institutionalised churning reminds me of the wise words of George Bernard Shaw: “A government that robs Peter to pay Paul can always depend on the support of Paul.”
We have often in the past questioned the practice of incentive-driven churning. The article titled Incentive-Driven Miss-selling, published in June this year, stated:
The practice of incentivising independent financial advisors to shift their investment and risk books is possibly the single biggest driver of churning, and is likely to be addressed as part of the review of retail distribution.
The Registrar intends to prohibit this practice as a matter of urgency, rather than wait for the RDR process.
“Sign-on incentives” are viewed by the Regulator as “…a major potential driver of incentive-driven churning of financial products for as long as the current distribution landscape and related remuneration models are in place.”
The FSB issued a discussion document on 1 September 2014, but only allows two weeks for responses from the industry in view of the scale of the problem, and to prevent further escalation during the discussion period.
In addition, the Registrar intends to “…continue to review sign-on bonus arrangements that have been entered into and will take appropriate regulatory action where this has resulted in evidence of incentive-driven churn.”
Section 3A of the General Code of Conduct will be amended by the addition of the following subsection:
“A provider or representative may not directly or indirectly, through a third party or otherwise, offer to or receive a sign-on bonus from any person.”
A “sign-on bonus is defined as “…any financial interest offered or received directly or indirectly, with or without conditions —
| (a) | as an incentive to recruit or to become a representative or provider; or | |
| (b) | as compensation for the- | |
| (i) | potential or actual loss of any benefit including any form of income, or part thereof, resulting from any act the result of which is that a person is recruited to or become a representative or provider; or | |
| (ii) | cost associated with the establishment of a provider’s business or operations, including the sourcing of business, relating to the rendering of financial services; or | |
| (c) | in the form of a loan, advance or credit facility and- | |
| (i) | where the utilisation or servicing of that loan, advance or credit facility is linked to the performance of any activity or the meeting of any target or standard relating to the rendering of financial services; or | |
| (ii) | the repayment of the loan or advance is in any manner linked to the termination of any act the result of which was that a person was recruited to or became a representative or provider;” | |
“The proposed amendment supports the consistent delivery of fair outcomes to consumers and ensures that advice is appropriate through explicitly addressing any potential conflicts of interest that may undermine a provider’s duty to act in the best interests of clients.”
The Registrar initially intended to “…address sign-on bonuses as part of the package of reforms to be proposed in the upcoming RDR Discussion Paper. However, due to delays in the finalisation of the RDR and concerns about an escalation in the practice of providers offering to or receiving of sign-on bonuses it was decided to urgently address this practice prior to the release of the RDR Discussion Paper. The comment period is restricted to two weeks in light of the risk of further escalation in the practice during the comment period.”
The Moonstone article referred to above concluded:
A resetting of the moral compass in the financial services industry is long overdue. Putting the interests of clients first, as it used to be, will be a huge step in the right direction.
The proposed steps outlined above indicate that this view is shared by the Registrar.
