Conflicted Advice Wins, Consumers Lose

Jonathan Rochford

Narrow Road Capital

This week the Federal Government released the draft regulations and an explanatory statement for its plan to ban commissions on LIC/LIT fees. The Federal Government did a poor job on the consultation process for these changes and has failed to answer basic questions on why commissions on some listed securities are banned whilst others are still allowed. The explanatory statement exposes the flawed logic in this process. I’ve copied several sections from the statement below in italics with my comments thereafter.

Stamping fees create a conflict of interest as licensees or their representatives receive greater remuneration if they recommend that their clients make an investment. This potentially incentivises financial service licensees and representatives to recommend a product without appropriate regard to the features and characteristics of the product or the client’s best interests.

I completely agree with this statement. It would be blatantly hypocritical to make this statement and continue to allow the rorts with debt, hybrid, REIT and equity securities to continue.

The Regulations amend the Corporations Regulations 2001 to remove the exemption from the prohibition on paying and receiving conflicted remuneration for stamping fees paid in respect of listed investment companies and listed investment trusts. The exemption is retained for real estate investment trusts and infrastructure entities.

There is no explanation why a fund of debt or equities is substantially different from a fund of property or infrastructure. Could it be that there isn’t a meaningful difference between these apart from having different groups lobbying for their respective interests?

The purpose of the Corporations Amendment (Stamping Fee Exemption) Regulations 2020 (the Regulations) is to prohibit the payment or receipt of stamping fees paid in respect of listed investment companies or listed investment trusts. This removes the incentive for financial services licensees or their representatives to mis-sell products to retail clients in order to increase their remuneration, resulting in poor consumer outcomes.

How is the incentive for mis-selling products being removed when commissions remains in place for debt, hybrid, REIT and equity securities?

It will be interesting to see how the opposition and the cross bench senators view this legislation. Will they look out for the best interests of consumers rather than a small group of vested interests that wants the gravy train of commissions to continue? 

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This article has been prepared for educational purposes and is in no way meant to be a substitute for professional and tailored financial advice. It contains information derived and sourced from a broad list of third parties and has been prepared on the basis that this third party information is accurate. This article expresses the views of the author at a point in time, and such views may change in the future with no obligation on Narrow Road Capital or the author to publicly update these views. Narrow Road Capital advises on and invests in a wide range of securities, including securities linked to the performance of various companies and financial institutions.

Portfolio Manager
Narrow Road Capital

Narrow Road Capital is a credit manager with a track record of higher returns and lower fees on Australian credit investments. Clients include institutions, not for profits and family offices.

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