The Australian government is introducing legislation this week to ban the grandfathering of conflicted remuneration paid to financial advisers as it warns that insurance companies may soon be held to the same standard as most other businesses in keeping their contracts fair.
The grandfathered commissions allow some advisers to pocket what would otherwise be considered prohibited forms of "conflicted remuneration".
Conflicted remuneration is where the payment of a benefit to a financial adviser may incentivise them to recommend to a consumer a financial product that may not be in their best interests.
they will receive higher quality advice and stop paying higher fees to fund grandfathered conflicted remuneration"
Grandfathered conflicted remuneration can entrench clients in older products even when newer, better and more affordable products are available on the market.
The ruling follows from a recommendation of the Hayne royal commission to end the payment of grandfathered commissions.
The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 will mandate grandfathered commissions are expelled by 1 January 2021.
The bill will also include the founding of a scheme that will make businesses still paying conflicted remuneration after after 1 January 2021 rebate clients for any remuneration paid.
The Treasury said the government has commissioned ASIC to monitor and report on the extent to which product issuers are acting to end the grandfathering of conflicted remuneration.
A statement from Treasurer Josh Frydenberg said the reform will benefit consumers, as "they will receive higher quality advice and stop paying higher fees to fund grandfathered conflicted remuneration."
Australia is also considering raising the standard the insurance sector must uphold. The commission recommended insurance contracts be held to the "unfair contract terms" laid out in existing competition and consumer laws.
The laws protect small business from standard contracts that would cause a significant imbalance in their rights and obligations, and are not reasonably necessary.
Contracts that would cause the consumer detriment, whether financial or otherwise, are also deemed unfair.
To date, insurance contracts have been exempt from the regime.
Frydenberg said removing the exemption will ensure consumers and small businesses have the same protections, regardless of whatever financial service or product they are purchasing.
The bid to remove unfair fine print from insurance policies has sparked warnings from the industry that premiums may be pushed up to guard against the risk of future lawsuits from customers.