Treasurer Josh Frydenberg Bans Conflicted Selling Fees on LICs/LITs

Christopher Joye

Coolabah Capital

In the AFR today I write that this is a great day for all Australian financial advisers and investors, and a brave decision by the Treasurer Josh Frydenberg, which was also vigorously advocated by Labor's shadow financial services minister, Stephen Jones. Excerpt enclosed:

By banning fund managers from paying sales commissions to advisers/brokers to push their investment products, the Coalition reinstates the consumer protections under the Corporations Act that prevent these conflicts of interest.

These safeguards, known as the Future of Financial Advice (FOFA) laws, were legislated in 2012 and completely reshaped the Australian financial advice and funds management industries by aligning the interests of investors with their advisers. No longer would advisers flog specific products just to claim a hefty commission.

In 2014 the Coalition created a bizarre carve-out from FOFA for Listed Investment Companies (LICs) and Listed Investment Trusts (LITs), which allowed fund managers to pay advisers/brokers unlimited selling fees to market their investments. This was not permitted for any other managed funds, including ETFs.

The loop-hole resulted in an explosion in these product sales, which have performed poorly, especially in periods of stress, such as March 2020, when almost all LICs/LITs traded at enormous discounts to their claimed net tangible asset values, imposing massive capital losses on investors in these products.

By reapplying the Corps Act's ban on conflicted remuneration to LICs/LITs, the Coalition is protecting mum and dad investors from extreme mis-selling risks while also creating strong competitive neutrality between all types of managed funds, be they LICs, LITs, ETFs or unlisted products. It will once again be a level playing field, which nobody can complain about.

As many would know, I have been writing about the need to protect FOFA since 2014, and have repeatedly highlighted this regulatory anomaly in the funds management domain. As a participant in the space, I am pleased that order has once again been restored to the advice and investment industries.

A big shout-out has to go to the AFR's senior writer John Kehoe, who deserves a Walkley Award for his amazing reporting on the subject. This included his enormously controversial freedom of information disclosures that revealed for the first time that ASIC had repeatedly advised the government in 2013 to not create the LIC/LIT carve-out in the first place and then reiterated the need to reinstate the ban in 2019.

With prodding from Labor's Stephen Jones, this was ultimately a courageous decision by the Treasurer Josh Frydenberg, who was under tremendous pressure from powerful interests in the LIC/LIT industry to retain their extraordinarily lucrative loop-hole (and presumably some Coalition colleagues who were keen to protect these parties).

The full government media release is published below.

On 27 January 2020 the Morrison Government announced that the Treasury would undertake a public consultation on the merits of the current stamping fee exemption in relation to listed investment companies and trusts (“LICs”).
Stamping fees are an upfront one-off commission paid to financial services licensees for their role in capital raisings associated with the initial public offerings of shares.
Following the conclusion of Treasury’s consultation, the Morrison Government will move to extend the ban on conflicted remuneration to LICs. These changes will take effect from 1 July 2020.
Whilst new LICs capital raisings have largely ceased since the inception of COVID-19, it is important that the ban on conflicted remuneration is extended ahead of any resumption of capital raising activity.
Clarifying these arrangements will address any related risk of consumer harm and ensure that stockbrokers, financial advisers and investment managers are clear about the regulatory settings that will apply in this area and investors can continue to invest with confidence in these products.
Extending the ban on conflicted remuneration to LICs will address risks associated with the potential mis-selling of these products to retail consumers, improve competitive neutrality in the funds management industry and provide long term certainty so that this segment of Australia’s capital markets can continue to operate effectively and provide investors with opportunities to diversify their investments.
The treatment of equity and debt securities in trading companies (including hybrids), real estate investment trusts (REITs), and listed infrastructure investments will not be impacted by these changes. Maintaining the existing treatment for these investments is designed to ensure that direct capital raising activities which support the economic activity of companies in the real economy are not impacted by these changes. Persons providing personal advice to a retail client in relation to these products will continue to be legally required to act in that client’s best interests.
The Australian Securities and Investments Commission (ASIC) will actively monitor arrangements in the lead up to and following the introduction of these changes.


Disclaimer: This information has been prepared by Smarter Money Investments Pty Ltd. It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Past performance is not an indicator of nor assures any future returns or risks. Smarter Money Investments Pty Limited (ACN 153 555 867) is authorised representative #000414337 of Coolabah Capital Institutional Investments Pty Ltd, which holds Australian Financial Services Licence No. 482238 and authorised representative #001277030 of EQT Responsible Entity Services Ltd that holds Australian Financial Services Licence No. 223271.

Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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