- The Federal Government will need to consider a ‘grandfathering’ period if it is to implement its Future of Financial Advice reforms.
If you google the well-known provision of the Commonwealth Constitution, section 51(xxxi), prominently appearing in Wikipedia will be the reference to the movie The Castle.
That film, apart from rendering famous the expressions ‘jousting sticks’ and ‘the vibe’, also popularised the constitutional principle that the Commonwealth cannot make laws which relate to the acquisition of property except on just terms. At least for those in the business world, the Future of Financial Advice (FoFA) reforms have repopularised this principle. The reason is simple.
The payments made by superannuation and wrap service providers to dealer groups are made for various purposes including for administration and distribution services. Those services are provided to consumers to allow them to access a choice of investment options effectively through a portal service, which is known in the industry as a platform.
The contracts held by dealer groups effectively grant them property rights over the payments made by the platforms. Commonwealth law implementing the FoFA reforms and seeking to ban these payments, by necessity must take into consideration this property in the framing of the law. If a law were passed which did offend the constitutional principle, the government would be faced with potential compensation claims.
Darryl Kerrigan successfully defends his right to keep his family home in The Castle, but section 51(xxxi) of the Australian Constitution is also a legal reality that is likely to shape the nature of reforms that are implemented.
It is usual in such imbroglios for pragmatism to play a role, with the realisation that structures that have existed for lengthy periods may sensibly require a period of time to be dismantled. This period is known as grandfathering. In the current context one detects a strong ‘vibe’ that grandfathering should be allowed. Such a period can serve from an equity point of view to allow the reconstruction of different and sanctioned remuneration models, particularly where the constitutional principle applies.
The question of grandfathering is a separate issue from the often passionate and moral debate as to whether such payments are a good thing or a bad thing as it must factor in constitutional and transition issues.
This is when the debate turns to the duration of such a grandfathering period. More particularly, whether the grandfather’s beard should be generous which would be the preference of industry, or whether it should be limited to stubble or preferably be non-existent which one assumes would be the wish of consumer groups. The image of jousting sticks at ten paces comes to mind in this context.
It is, at the end of the day, a balancing exercise between policy intent and implementation on the one hand and practical, as well as legal, exigencies on the other.
It remains to be seen whether and how the government adopts the grandfathering approach, at the same time maintaining its strong stance that such payments will generally be impermissible.
This article first appeared in the Australian Financial Review.