Clients to get trail commissions

Banks contractually required to pay trailing commissions will have to pass them on to clients, under new rules.

Federal Treasurer Josh Frydenberg. Picture: AAP

Regulations to be released by Treasurer Josh Frydenberg today will require banks and other financial product manufacturers who are contractually required to pay trailing commissions to instead pass them on to clients.

The regulation, which will come into force in 2021, is part of a package of measures introduced by Mr Frydenberg to end the “grandfathering” of trailing commissions paid to financial advisers, as recommended by the Hayne royal commission.

New trailing commissions were banned in 2013 as part of Labor’s Future of Financial Advice package, but payments made under arrangements in force at the time were allowed to continue.

At the time, it was broadly expected that the lucrative payments would wither away, but royal commission hearings revealed that finance groups have gone to great lengths to preserve them.

The commission heard that the banks were afraid financial advisers would move their clients away from their products if they stopped making the payments.

Mr Frydenberg’s new regulation requires clients who can be directly identified as the source of a specific trailing commission to receive a cash rebate. This category would include customers of financial planners who got a commission for selling them a particular product.

When clients cannot be individually identified, the trail payment is to be divided among the client group in a “just and equitable way”, either as a cash rebate or as some other monetary benefit including a fee reduction.

Mr Frydenberg’s move on trailing commissions for financial advice comes after The Australian revealed on Monday that consumer groups were concerned the Morrison government might backslide on its commitment to end the payments.

Consumer groups became alarmed after the government walked away from Mr Hayne’s recommendation for a ban on trailing commissions for mortgage brokers and the powerful Council of Financial Regulators abandoned efforts to force ­another royal commission recommendation extending small business protections in the banking code to more customers.

Mr Frydenberg defended the Coalition’s record in implementing Mr Hayne’s reforms, saying it was “taking action on all 76 recommendations contained in the royal commission’s final report and, in a number of important areas, is going further”.

“Restoring trust in Australia’s financial system is part of our plan for a stronger economy,” he said.

He said the regulation was “designed to ensure that it is consumers, not industry, that benefit from the ban”.

Labor has been campaigning hard on the royal commission, with treasury spokesman Chris Bowen attacking the government for opposing the inquiry 26 times before calling it on and pledging a faster and more comprehensive implementation of Mr Hayne’s 76 recommendations than the Coalition.

It proposes to end grandfathered commissions from January 1, 2020 — a year earlier than the government intends.