The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been handed down – and it contains a whopping 76 recommendations across three volumes totalling 1,133 pages.
Treasurer Josh Frydenberg said in a speech that the government was “committed” to taking action on all 76 recommendations. He said the banking sector “must change and change forever” and Australians have already paid an “immense” financial and emotional price for misconduct in the banking industry.
He acknowledged that the misconduct had broken lives and that the price paid by the community had been immense.
In a snapshot, here are some of the core findings:
Commissions will be reduced to zero
No more cold calling to buy financial products
You’ll have to start paying for your mortgage broker
Your financial adviser will be under more scrutiny
A new authority will be set up to regulate the bank regulators
But what does all of this mean for you? We’ve broken it down:
1. If you work in financial services… say ‘bye bye’ to your commissions
Commission arrangements where the adviser or product is conflicted should be repealed as soon as possible.
Additionally, corporate watchdog ASIC should consider cutting commissions paid out to those selling life insurance further, or to zero, upon the finalisation of its review into life risk products.
The overall report has been scathing of the bank’s greedy sales and commission culture that led to the appalling treatment of customers.
2. You won’t be harassed to buy financial products you don’t need
The report states that Australians – including vulnerable Australians – had been manipulated into buying financial products they didn’t want or can’t afford.
But if recommendation 3.4 and 4.1 kicks into place, Aussies won’t have to deal with this problem anymore: superannuation and insurance product sellers will be banned from making unsolicited offers or sales – unless the customer expressly asks for it.
3. You’ll have to start paying for your mortgage broker
Broker fees are currently paid by the lender as a commission payment.
But if the royal commission’s recommendation to have the borrower pay the broker fee, you will be paying upfront for your broker’s services.
At the same time, lenders will be forced to phase-out broker trail commissions. These commissions, paid to the brokers after you’ve obtained the loan on the basis that they will continue to service your needs, will be phased out.
It’s a massive blow for the industry.
And possibly for the consumer.
According to a new report from market research provider, Momentum Intelligence, 96 per cent of people who used a broker were satisfied or very satisfied and 58 per cent don’t want to pay a ‘fee-for-service’.
“A serious implication of the proposed fee-for-service model is that consumers would be naturally driven to their primary personal bank, which is likely to be one of the big four. This would reduce competition by driving smaller lenders, who rely heavily on brokers, out of the market,” director of Momentum Intelligence Alex Whitlock said.
“Fewer lenders will give the dominant retail banks the opportunity to increase their margin by pushing up interest rates. With mortgage repayments and household debt concerns looming, this result could also potentially lead to higher financial distress for Australian consumers.”
The managing director of the Finance Brokers Association of Australia (FBAA) Peter White condemned the recommendations.
In a vehement statement this afternoon, he warned the recommendations could push up interest rates and even reduce housing affordability.
“Commissioner Hayne wants to hand even more power to the big banks and eliminate competition, which is a ridiculous scenario and shows just how out of touch he is when it comes to brokers,” White said.
“If a user-pays model was implemented, we know that most borrowers wouldn’t pay, and banks would make more money and standards would drop further.
4. You’ll be better-protected from dodgy financial advisers
Financial advisers who have previously wrongly claimed to be independent will have to disclose to clients why they’re not.
Financial advisers have strict parameters on declaring themselves “independent”, “impartial” or “unbiased” – and using these words to inaccurately describe themselves amounts to a contravention of the Corporations Act.
Now, those who have contravened that act will have to provide a written statement to their clients explaining “simply and concisely” exactly why they’re not independent, impartial or unbiased.
Wrong-doing financial advisers will be called out. Holders of Australian Financial Services Licenses (AFSL) will also have to report “serious compliance concerns” about individual financial advisers to ASIC.
Where AFSL license holders suspect a financial adviser has done the wrong thing, they’re now required to inquire into the misconduct, let affected clients know and remediate them promptly.
A new ‘disciplinary body’ will be set up. The royal commission has recommended a new “disciplinary system” be set up to have all financial advisers registered; have AFSL holders dob in “serious compliance concerns”; and have clients or other stakeholders be able to report information on the conduct of their advisers to the disciplinary body.
5. Your regulators will be regulated
The two regulators, ASIC and APRA, didn’t escape the Royal Commission’s scrutiny during the major inquiry, with public sentiment being that the watchdogs were too soft or too thinly stretched to take on the institutions at the big end of town.
Significantly, the Royal Commission has recommended the Government set up a new authority, independent of the Government, to assess how effective each regulator is in doing their jobs overseeing the banks.
So – the regulators of the banks will be more closely watched to ensure they’re doing their jobs.
How does this affect customers?
It’s very much a trickle-down effect: if regulators are cracking down more tightly on the banks, they may tighten up their lending standards as government and regulator scrutiny take effect. This means consumers may find it harder to obtain a loan, warned Finder’s Angus Kidman.
Echoing Kidman, Canstar group executive of financial services Steve Mickenbecker said that while Australian consumers will ultimately benefit from the reinforcement of customer-first principles, he warned an overreaction could be harmful.
“An over-reaction and over-tightening of credit could turn out to be a “careful what you wish for” moment, with potential for overly tough credit, smashed property prices and low growth.”
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