Product manufacturers will be required to rebate grandfathered commissions to clients for any products still in use after January 2021 under proposed new regulations.

The Federal Government also wants to force product manufacturers to keep records on the amounts rebated.

“Grandfathered commissions can entrench clients in older products when newer, better and more affordable products are available on the market,” Treasurer Josh Frydenberg said.

Draft legislation to ban grandfathering from 2021 has already been released following a Hayne royal commission recommendation.

But the Association of Financial Advisers (AFA) has criticised the rebate proposal, arguing it creates huge complexity. It says every rebated commission could have tax implications, including being treated as income for the client.

“If the outcome was the rebating of a grandfathered commission and the introduction of an adviser service fee, there will be a lot of additional transactions on their account for no benefit,” the AFA says.

“In fact, the fees are likely to increase due to the additional complexity.”

It would be better to move clients to better products whenever possible, the AFA says.

A recent review by the Australian Securities and Investments Commission appears to indicate the level of grandfathered commissions is quite small. And analysis from financial advice researcher Investment Trends indicates that grandfathered commissions have declined to just 9% of total practice income, according to the AFA.

The AFA says there is a lack of clarity on how the ban will be implemented, and the 2021 timeframe is therefore unreasonable.

The financial services sector’s rush to offer reforms and the general hesitancy to question some of the Hayne recommendations has made the proposal to ban grandfathered commissions somewhat predictable and unavoidable, it says. Yet there is no coherent explanation of the policy objective to end grandfathered commissions.