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‘Catastrophic’ debt situation feared from royal commission tinkering

Kenneth Hayne

If one of the key recommendations from the royal commission’s first report is adopted, it may have a catastrophic impact on the debt arrangements for some financial advisers, with their clients absorbing the aftershocks.

In its final report into superannuation, the Productivity Commission recommended that the government ban trailing commissions as soon as practicable. While these commissions were banned in 2013 for new accounts, commissions remain in the system from when they were grandfathered six years ago under transitional arrangements.

In the current climate, irrespective of which party wins the next election, SMSF Alliance principal David Busoli said it is quite possible that the government would support the banning of grandfathered commissions.

This would leave financial advisers who previously borrowed large sums of money to buy trail books, for the purposes of receiving these grandfathered commissions, with an asset that is essentially worthless – but a debt that still requires servicing.

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This could have a major knock-on impact to the financial advisers’ business, and consequently, their client book.

“For someone with a $2 million loan secured by a trail book, which has been funding the payments, there is a real problem. The adviser will still be liable for the debt with, probably, no real prospect of servicing it so who will be left ‘holding the can’?” said Mr Busoli.

“The trail books and personal guarantees have generally been the only security for these loans. The marketing of these geared investments was actively promoted by the adviser’s principal company and funded by a related bank. It is to be hoped, therefore, that responsibility for any resultant loss will not be simply dumped onto the adviser,” he said.

“I know some firms that have $2-3 million in loans. It’s huge, especially if there’s nothing to fund it so the potential loss of trail commissions is far more than just a consumer issue,” he said.

“If grandfathered commissions are stopped, where do these people stand? Let’s hope they are supported by the parties that encouraged them into these arrangements in the first place.”

The royal commission’s final report has been handed down to government and is due for release this afternoon. 

 

‘Catastrophic’ debt situation feared from royal commission tinkering
Kenneth Hayne
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