The Royal Commission:What does it mean for you?

The Royal Commission has handed down 76 recommendations, all of which the Government intends to implement. However, the new regulations will be debated in parliament and could take several months to enact. Essentially, the focus of the recommendations is on having all financial institutions and advisers put their clients first as a priority and to deliver a service commensurate with the fee charged.

We have also mentioned some of the changes proposed by the Labour Party if elected this year.

Some of the key proposals include:
1)The removal of all contribution and exit fees from super products.

2)Prohibition on “hawking” super products. This has previously involved phoning people to sell product or attempting to “cross sell” product in a meeting about another issue. This will outlaw the distribution methods sometimes used by banks to sell super and property companies promoting the establishment of self managed super funds to buy property.

3)Civil penalties will apply to super fund trustees who fail to act in the best interests of their members.

4)An industry funded compensation scheme of last resort will be established to compensate clients for losses incurred due to “advice failure”. This will come into play if existing compensation
avenues are unable to pay appropriate compensation (eg if advice firm is liquidated).

From an ongoing financial adviser/client relationship perspective, major changes include:
1)The removal of grandfathered trail commissions by January 2021. Where an adviser has been remunerated for their advice by the payment of “built in” trail commissions on older products, an appropriate fee payable by the client for future advice will need to be agreed upon. The fee can be paid from the client’s fund in most cases (see exceptions below) or their own savings.

2)The prohibition of a deduction of any advice fee (excluding intra-fund advice) from superannuation accounts other than MySuper accounts, unless an annual contract renewal with clients has been met. (see below)

3) Where a client is paying ongoing fees, a “service agreement” setting out the fees to apply and the advice services to be delivered, will need to be negotiated with the client annually. The idea is to make ongoing fees transparent and commensurate with the level of services provided.

The Election
The Labour Party has stated its intention to introduce some significant changes if elected, which would presumably start from 1st July 2019. These include:
1)Restriction on claims for negative gearing to new housing and a reduction in the capital gains tax discount from 50% to 25%. While not retrospective, borrowing to buy property and other investments may become a less attractive strategy for some people.
2)Remove refund of share dividend franking credits, except for Centrelink pension recipients including allowances. This will most affect non Centrelink lower income earners and self managed super fund members whose share portfolios will deliver lower returns.
3)Distributions from discretionary trusts to people over 18 years old to be taxed at 30%. The intention is to limit income splitting from family trusts to save tax. However, this measure may also have implications for trusts in which SMSFs invest.
4)Taxation of super fund earnings above $75K pa at 15%. This would effectively put a lower cap on the amount of tax free pension income that a super fund member could receive. Therefore, other investment vehicles may become more relevant.
5)To increase the compulsory super contribution from 9% to 12% as soon as possible. We assume this means that the target contribution will be achieved earlier than July 2025 as currently legislated.

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