Conflicted remuneration – stockbrokers defend brokerage carve-out

Mike Taylor

Managing Editor/Publisher, Financial Newswire

21 November 2022

Stockbrokers are urging the Quality of Advice Review (QAR) to tread carefully with respect to conflicted remuneration and to not remove the legislative carve-outs which have protected the status of brokerage fees.

At the same time, the Stockbrokers and Investments Advisers Association (SIAA) has welcomed the QAR’s view that there is no evidence that the exceptions relating to stamping fees and brokerage are not, in general terms, an appropriate and fair way to remunerate advisers for their services.

“As we stated in our submission on the Quality of Advice Issues Paper, removing the brokerage exemption would impact the traditional remuneration arrangements of employee brokers without conferring any benefit on the client and would have a significant impact on the ability of stockbroking firms to provide their services,” the SIAA said.

“Removing the stamping fee exemption would reduce retail access to primary capital raisings and the participation of retail clients in markets overall as well as increase the cost of capital to industry.

“SIAA continues to advocate strongly for the return of the stamping fee exemption for Listed Investment Companies (LICs) and Listed Investment Trusts (LITs) to facilitate capital raising for these entities,” the submission said.

The SIAA explained that typical charging model for stockbrokers involves a payment, commonly referred to as both brokerage and a commission, from the client to the broker that is typically charged as a percentage of the value of a certain transaction or a fee per transaction.

“Treasury noted at the time the FOFA reforms were implemented that a transparent and product-neutral regime with a client-paid fee — which is what brokerage is — would not be subject to the ban on conflicted remuneration.”

“The majority of our member firms that provide advice to retail clients have a remuneration structure for advisers which typically includes both:

• a retainer (salary),
• and a share of the brokerage charged to clients (commission), either paid regularly or as an annual bonus.

“These arrangements do not give rise to the types of conflicts that the FOFA reforms were seeking to address. The same commission-sharing arrangements apply between the firm and the individual adviser regardless of the particular shares that a client may buy or sell. An adviser does not benefit from steering a client into, say, buying BHP rather than ANZ, because his or her commission will not differ because of the particular security, nor will BHP or ANZ provide incentives to the adviser to recommend their shares. That is, brokerage is product-neutral. This is the reason why regulations were passed to ensure that the traditional remuneration arrangements of brokers were not unduly impacted by the conflicted remuneration provisions.”

“It is important that any proposals of the Quality of Advice Review do not impact on these arrangements. We have highlighted below where we caution against proposals that remove exemptions relevant to our members or where the removal may give rise to unintended consequences.”