Business

Saturday September 12, 2009

Banning commissions: Are we ready?

By FINTAN NG


IN recent months, the remuneration of senior bank executives including bonuses has become the subject of much criticism, from governments that have bailed various banks on the brink of collapse when the financial crisis reached its apogee a year ago and from the public, from which the bailout funds ultimately come from.

Now, regulators in several countries are looking into banning commissions (also known as entry load fees in the mutual funds industry) for mutual fund distributors in a move to align the interests of the industry and retail clients and as well as to promote best practices.

This comes as part of the reformation of financial services that is happening now in parts of the world with US President Barack Obama laying out his plan for financial re-regulation on June 17.

Investors have seen their investments in such products lose value to the tune of hundreds of billions of dollars as the global economy contracted at a faster pace following last September’s financial meltdown.

There is also widespread distrust of the financial services industry as the world was treated to revelations of fraud involving billions of dollars by Wall Street insiders such as Bernard Madoff and Allen Stanford.

India became the first major country to implement such a ban when the Securities and Exchange Board of India (SEBI) issued guidelines on the banning of entry load fees in mid-June. In a later announcement, the market regulator said this would be implemented from Aug 1.

“The move is to empower investors through transparency in payment of commission and to incentivise long-term investment,” SEBI said in a late June announcement.

Britain’s Financial Services Authority (FSA) has also proposed on June 25 a ban on brokerage commissions that will come into effect end of 2012. It is now inviting comments from the industry through the end of October.

It said this was part of provisions to “build people’s trust and confidence in the retail investment market” and is part of the overall plan for re-regulating investing for retail investors.

The Financial Planning Association of Malaysia (FPAM), in an e-mail reply to StarBizWeek, says while its members are not opposed to the idea of doing away with commissions, they believe the market should decide the pace and the way it is to be done.

“In Malaysia, implementing a strict “no commission” structure immediately may cause the untimely demise of the financial planning industry, which currently has less than 300 licensed practitioners” it adds.

Indeed, the London-based Financial Times reported that thousands of independent financial advisers, perhaps up to half of them, will leave the business as a result of the commission ban by the FSA.

The FPAM says the market should be given time to mature while ensuring that it grows towards the “no commission” direction.

“We hope that ultimately, the market will mature in that direction in which consumers, recognising the value of a financial plan, will happily pay the fees for it and financial planners, having been recognised as professionals in their own right, can choose to focus on fee-earning financial plans without having to depend on commissions,” it says.

The FPAM says at this stage, financial planners are largely remunerated in the work through a combination of fees and commissions and that even in mature markets such as the United States, the prevailing model remains that of the fee-plus-commission model.

The association says where best practices are concerned, “consumers may benefit in terms of objectivity of advice arising from the clear cut division in functions between advice (fees) and product selling (commission)”.

However, it says consumers must be prepared to pay for the price of advice if the industry is to be sustainable, as there are also further cost implications arising from the separation of functions.

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