Banning embedded commissions: What Canada can learn from the Australian and U.K. experience

By Susan Yellin | November 01 2013 03:38PM

The United Kingdom did it in January. Australia did it in July. Will Canadian regulators follow these two other jurisdictions in banning embedded commissions and trailers? There are, of course, different sides to this question as witnessed in June when investor advocates, the investment funds industry and Canadian advisors lined up as the Ontario Securities Commission, taking the lead for the Canadian Securities Administrators, held a roundtable into Canada’s mutual fund fee structure.

In Australia, where banning commissions took effect July 1, the belief is that it’s only a matter of time for Canada.

“It’s interesting to think how far in front Australia is internationally in terms of already having banned commissions,” said Dante De Gori, general manager, policy and conduct with the Financial Planning Association of Australia Ltd. “For Canada, it’s not a matter of if, but when [it will follow suit].”

However, Jon Cockerline, director, policy and research with The Investment Funds Institute of Canada disagreed, saying the differences between Canadian investors and regulators and those in the UK and Australia vary so much that a direct comparison cannot be made.

“It’s so simplistic to look at another country and say we should do the same thing here unless you know the context for the imposition of the regulatory policy there.”

The Insurance and Investment Journal contacted some key players in the U.K. and Australian markets to look at why the UK and Australia moved to a (mainly) fee-only commission system.

The United Kingdom

The UK’s Retail Distribution Review (RDR) went into effect Jan. 1 2013, following highly publicized cases of advisors mis-selling products to investors, said Mike Gould, senior advisor, retail distribution with the Investment Management Association, the group representing UK investment management industry members.

In particular, said Gould, were instances where gadvisors sold endowment policies to pay for mortgages, reaping a “fairly generous commission” but which might not necessarily have been the best option for the investor.

The regulator concluded that investors were not clear on how they were paying their advisors for financial advice and the different kinds of advice available.

The result was RDR, with its three-pronged goal: ending commissions, embedded or otherwise, with charges paid by consumers up-front to ensure they were aware of what they were paying; establishing “independent” and “restricted” advisors – those who can advise on any product or service and those that have a limited list of products and providers they can advise on and raising the minimum level of qualification for advisors.

For advisors, the change has meant moving from a top-down, big picture approach to a bottom-up, fee-for-service method where investors are more in control of how much they pay and who they pay it to, said Phil Billingham, CFP and a member of the board of directors of the Institute of Financial Planning in London.

But he said it’s not quite accurate to say that the industry has moved totally to a fee-only model.

“An advisor can tell a client how much the fee is and it is up the client to determine if that is fair. Let’s say the cost is $5,000,” Billingham said in an interview. “The advisor can say: instead of you writing me a cheque for that $5,000 you authorize the provider – the fund manager for instance – to deduct that $5,000 from your investment and that pays me.”

As well, a financial advisor can continue to receive trailers for advice on investments that were purchased before Dec. 31, 2012. And commissions continue on insurance and mortgage products, among a few others.

Last year, the UK also began an automatic pension enrolment program that includes contributions from employees and employers with the government providing tax relief.

The project is being rolled out over six years and has seen many UK advisors moving into retirement planning, with others specializing in high net-worth clients, said Billingham.


While there are between 16,000 and 17,000 financial planners in Australia, their role as chief providers of advice and products is somewhat overtaken by the government’s Superannuation Guarantee, the official term for compulsory retirement contributions made by employers on behalf of their employees.

Superannuation, which began in 1992 with most employers contributing the equivalent of three per cent of all employees’ salaries, is now up to 9.25 per cent and is scheduled to rise to 12 per cent by July 2019. (The contribution is deducted from employees’ salaries and in certain cases, employees can add more.)

Under this scenario, businesses contribute the superannuation contribution into a “super fund” of their choosing, which is used as the default if an employee has no other preference. Advisors may recommend which fund employees go in, but on the whole, most Australians do not make an active choice and end up in the default fund, said Martin Codina, director of policy and international markets with the Financial Services Council, the organization that represents investment fund managers and users of financial advice in Australia. Putting money into a super fund comes with tax incentives for employees.

The advisor’s role is more prevalent with high net-worth clients or as clients age and get closer to retirement, but they do provide holistic advice on everything from setting goals to debt management for those who want it, Codina said in an interview.

The global crisis of 2006 saw the collapse of a number of investment firms and when the government called an inquiry, there was consensus that a number of Australians had lost major chunks of their life savings.

Even though that may have heightened the debate over banning advisor commissions, Codina said discussions on the subject had been going on for some time, especially in light of superannuation.

“The view was held that in a compulsory system it was inappropriate for advisors to be earning a commission. It wasn’t justified that an advisor would earn a commission simply because 10 years ago they recommended you go into a specific fund,” said Codina.

“[But] in the absence of superannuation being compulsory, I’m not sure we would have banned commissions or as early as we did.”

As of July 1, Australian advisors no longer receive embedded commissions for investment financial products. However, an advisor selling a product like a pure life insurance policy with no investment component can still receive a commission, Codina said.

Unless employed by a firm and getting a salary, the only way most advisors now get paid is through the client, on a fee-for-service basis, not the product provider, said De Gori. Fees to clients must be disclosed individually, can be negotiated and are agreed to individually – and can be “turned off” at any time by the client if they find a better deal elsewhere, he said in an interview.

IFIC’s Cockerline said Canada paints a different picture than either the UK or Australia. Canada has not had the kinds or scope of mis-sellings as in those other countries, and there is a greater reliance on individuals to save for themselves with the result that there is a greater depth and diversity of advice in Canada. There are also more layers of regulatory oversight in Canada.

And while clients with fee-for-service advisors do get disclosure, said Cockerline, it’s not necessarily superior disclosure to the current MER model and advisors’ trailers, which are already outlined in the prospectus.

“In a fee-for-service model, you know what you’re paying but you don’t know what the rest of the market is paying. You don’t know if you’re making a deal or not. Compare that to a world where it’s public information as to what the market value is.”