Amongst the long list of 76 key recommendations, here are the ‘highlights’…
- Bankers are not named and shamed, but Kenneth Hayne lays out the potential for more than 20 prosecutions involving the major banks, at the discretion of the regulators, some of which could be criminal, some civil, and some both.
- Of the 24 referrals for “further action”, all the major banks are listed, except Westpac.
- The regulators stay as they are, but are on notice to do better when it comes to enforcement. If ASIC doesn’t pick up its game and prosecute more often, not just settle out of plain sight, there is room to make it just an investigative body and hand prosecuting powers to something else.
- The report points the way to an end to practices such as conflicted remuneration – you can’t advise for a client and get rewarded by a bank/financial service for providing that client at the same time, for instance. That seems like a pretty big no brainer, but it has taken a royal commission to get here.
- There will be a compensation scheme of last resort, funded by the banks. The government is working up legislation on that now. All the banks will have to pay, because it is part of their licence. For those who belonged to entities that have gone belly up, you’ll also be covered.
What the government will do in response to some of Kenneth Hayne’s 76 recommendations:
- Mortgage brokers will be required to act in the best interests of borrowers.
- Conflicts of interest between brokers and consumers will be removed by banning trail commissions and other inappropriate forms of lender-paid commissions on new loans from 1 July 2020. There will be a further review in three years on the implications of removing upfront commissions and moving to a borrower pays remuneration structure.
- Grandfathering of the conflicted remuneration provisions to be ended effective 1 January 2021 and, in addition to the commission’s recommendation, requiring that any grandfathered conflicted remuneration at this date be rebated to clients.
- Ensuring superannuation fund members only have one default account (for new members entering the system).
- Vulnerable consumers will be protected through clarifying and strengthening the unsolicited selling (antihawking) provisions, including for superannuation and insurance products.
- Deduction of any advice fees to be prohibited (other than intrafund advice) from MySuper accounts.
- Expansion of the definition of small business in the Banking Code.
- Comprehensive national scheme for farm debt mediation to be established.
- Elimination of default interest on loans in areas impacted by natural disasters.
- Appointment of receivers or any other form of external administrator only as a remedy of last resort.
- More inclusive practices for Aboriginal and Torres Strait Islander persons.
Whilst there is plenty on this list that was expected, the one huge point that could be a real ‘game changer’ is the change to how finance brokers are remunerated.
The report condemned the way that finance brokers are remunerated and suggested that the client themselves should be the one that remunerates a finance broker rather than the bank…and questions how a finance broker could be act in the borrower’s best interests if the banks are paying their fee.
In case you’re not aware, finance brokers will often receive an upfront commission on the settlement of the loan and often a ‘trail’ whereby the broker will earn a residual income from the monthly repayment for the life of the loan.
The client (in most cases over the past decade) has not directly paid a finance broker in any capacity.
A finance broker’s business can often be worth an amount of money given the ‘trail’ that has been accumulated over time.
It would appear that finance brokers will lose the ability to earn a ‘trail’ within the next 18 months (although any loans written before the changeover would be ‘grandfathered’ – meaning that they would continue to be earned past the changeover date).
One thing is for certain – if clients have not paid for the use of finance broker for more than 10 years, it will be a hard pill to swallow when they will be required to pay reasonable sums of money that they haven’t been used to paying in the past.
Will this wipe out the finance broking industry?
Given almost 60% of loans are processed through finance brokers right now, it is a huge change to consider.
But what is often being forgotten is that the finance broker will spend plenty of time chasing the appropriate documents and forms of identification and forms required to process a loan…and should the broking industry be brought to its’ knees, it must be questioned whether the banks will have the resources to handle this much extra work.
One thing is for certain – the banks themselves have been the clear winners from this recommendation and the share price of each of the ‘Big 4’ banks skyrocketed yesterday as a result (yesterday alone, the four major banks had their best day on the stock market in almost a decade.
In contrast, leading Mortgage Broking firm ‘Mortgage Choice’ dropped 27% in share price.
It’s quite ironic when you consider that the Royal Commission was established to inquire into the misconduct of banks in the first place.
As one leading financial analyst put it…
“It is possible that the banks may face criminal proceedings, but we do not believe that any of the 76 recommendations will have a material financial impact on the banks.”
It will be interesting to see how the banks respond and how the broking industry will seek remuneration.
It would seem that the industry may take a similar path to real estate sales whereby those that advertise a ‘lower commission’ will attempt to attract more business.
One thing is for certain, you’ll hear far more about this discussion in the months to come.
Until next week, Happy Listing & Happy Selling!