Cuenta General de las Empresas Públicas

One submitter stated that fiduciary or “independent” advisers should not be permitted to accept third party payments. It was submitted that advisers who are in effect salespersons and non- independent and representing themselves as such should be permitted to receive third party payments. It was submitted that rebates or concessionary rates should always be passed back to clients by independent advisers.

Neutral

One submitter stated that they did not have a position on whether commission should be discontinued. That submitter stated that they do not consider that any of its current advisers receive commission within the usual meaning of that term.

One submitter stated that their advisers do not charge commission for their advice. It was stated that bonus and incentive payments of advisers do not affect the level of fees payable to the client.

Commission should not be banned

One submitter stated that this approach is inappropriate. It was submitted that the object of regulatory reform and ongoing supervision should be to create standards and govern behaviour and to encourage professionalism. They stated that choosing a particular business model or form of remuneration and attempting to ban it when it is acceptable and desirable for the majority of consumers and industries is inappropriate and inequitable. It was submitted that bad law will inevitably be worked around.

One submitter stated that this would not be appropriate for New Zealand. It was submitted that it is not commissions that matter but integrity. It was also submitted that commission should not be banned. It was also stated that the implication appears to be that if you work on a commission basis then the advice is tainted or of no use. That submitter stated that banning commission would have a dramatic effect on the industry.

One submitter stated that product providers (finance companies) are wholesalers and advisers are retailers. It was submitted that retailers incur costs which must be reimbursed and that commission is a transparent way of making sales related compensation. They stated that the commission is paid as income to the adviser to cover his or her costs and it is not the property of any particular investor. That submitter stated that to get rid of the word “commission” and its negative connotations, advisers could be recompensed via a distribution allowance ie a lump sum payment with a formula being detailed in the Investment Statement. It was suggested that those charged with approving investment statements must ensure a fairly level playing field between those marketing through advisers (exclusively or in parallel with in-house distribution).

One submitter suggested that commission is not the real issue and the real problem is poor advice and inappropriate portfolios. That submitter stated that banning commission will not necessarily lead to better advice.

One submitter noted that banning commissions in a share broking or bond trading environment could be very difficult, and requires further consideration.

One submitter suggested that commissions could not be banned until financial literacy among the public was increased, so that members of the public were willing to pay fees for independent advice. They stated that until then, banning commissions would just leave most non-wealthy clients to flounder.

One submitter suggested that, in the future, it might be appropriate to set commissions “across the board” so that the adviser receives the same commission regardless of the recommendation made.

One submitter pointed to the uninformed nature of much of the public discussion of commissions, and noted that KiwiSaver legislation places severe constraints on the commissions payable so the problems that have occurred in the UK, for example, cannot occur here. That submitter noted that upfront commissions are now relatively uncommon, and that they are often rebated. It noted that trail commissions vary little from one product to another, and argued that clients were protected if full disclosure was provided.

One submitter was resolutely opposed to this proposal.

Two submitters stated that they strongly opposed the proposal to ban commissions, and suggested that it would have a damaging effect on attempts to develop the country’s capital markets.

One submitter suggested that, given the scope of the changes already being contemplated, banning commissions would be too drastic a step – and have too drastic implications for the provision of financial advice in New Zealand – to be done at the same time.

One submitter questioned the assumption that commissions necessarily created bias or conflict, and also pointed out that not all commissions are the same. They also suggested that it was only with non-bank deposit takers that there was a perception of commissions create undue pressure to place business with a particular provider. They stated that this perception did not apply to equity issuers. Two submitters suggested that it would be grossly inappropriate to attempt to define acceptable revenue methods. Those submitters suggested that any attempts to define acceptable forms of revenue would lead participants to attempt to circumvent the rules.

One submitter suggested that there was also the potential for unintended consequences, so that brokers might become liable for underwriting fees, thus making them more keen to sell the products, creating a hidden conflict.

One submitter suggested that commissions per se were not the problem. On the basis of an analysis of the commissions paid by various failed finance companies, it was suggested that the problem was largely a certain number of “crooked” advisers, as well as “crooked” issuers. That submitter also noted that there was not necessarily a link between high commissions and rates of finance company collapse. They stated that some of the highest commissions are payable on managed funds (offered by banks, for example), and that the incentives that some companies offered were often soft dollars. That submitter also noted that advisers often did not even know how much a commission would be (i.e. how much the client invests) until the credit appears in their account.

One submitter argued that at least 50% of the business of failed finance companies was done directly with clients, so they stated that the link between commissions and finance company failures is tenuous.

One submitter suggested that all forms of remuneration bear moral hazard, and referred to the blog entry for 4 December 2009 on the Goodreturns website.

One submitter suggested that commissions serve a useful purpose, and if he, as an investor, was happy with his adviser receiving a commission did not see why the Code should prevent that.

One submitter pointed out that current legislation requires financial advisers to make sure the product is fit for purpose and that this reduces any concerns regarding bias with regard to commission.

One submitter stated that the issue is more complex than simply banning commission. Her recommendation was that issuers should ensure that commission is commensurate with the level of risk and that this is disclosed to the investor. That submitter stated that where an adviser charges a fee, the commission should be rebated to the consumer but above all, the risk profile of the security

should be made clear. She submitted that it should be compulsory for AFAs to provide a view of the security including the risks associated with the investment.

One submitter suggested that detailed research on advisers’ actual revenue streams be done before imposing requirements. They stated that if commissions were banned, the transition would have to be managed carefully and the public’s financial literacy improved.