The most anticipated Royal Commission (RC) report in Australian Financials system was made public on 1 February 2019. The report was handed by Kenneth Hayne to Government on Friday. Despite, the cold interaction with treasurer on Friday afternoon, the report had plenty of ammunition to cause firing debate.
Leading up to the Royal Commission, Australian housing market has seen credit squeeze due to prudential regulatory measure after intervention by watchdogs Australian Prudential and Regulatory Authority (APRA) which has arguably brought the property market to its knees.
During the RC inquiry, 6500 exhibits were held and were focused on banking, superannuation, insurances, financial advice, regulatory and rural lending.
There were 76 recommendations from RC within those areas. Government has vowed to implement all those on principle however, some of them take few more years or additional amendments prior to implementing.
Opposition has pledged to implement the full recommendation while government has assured to revisit all the scenarios prior to committing.
What are the changes?
Borrower should pay for mortgage broker services, rather than lender.
Mortgage brokers needs to act in borrower’s best interest, not the bank or financier.
Likewise, leading to the RC hearing, banks were subject to greater scrutiny where, financial advising clients were charged annually without providing any advice. Brokers were getting trail commission for years without providing any ongoing advice to client.
Currently, brokers can get paid up to 0.20% commissions of loan balance annually for the life of the loan from inception. And, this could be for 30 years if borrower were to continue with existing product. This is only industry with such a generous loyalty scheme, ensuring residual income for long time. RC has decided there will be no trail commission to mortgage broker for new loans from 01 July 2020. This is where it is going to hurt the most brokers or loan writers who usually rely on this with their big loan books.
The Banking executive regime and accountability should be expanded to track those found guilty and proceed to civil and criminal charges or both over 20 prosecutions.
Also, 20 prosecutions against banking executives are referred with civil and criminal charges or both which may even result in fines and jail time. Hayne has referred to regulators total of 24 companies and their executives for civil and criminal offences including likes for ANZ, NAB, Comminsure, Allianz, AMP and Clearview.
With the proposed “fee for service” model to be implemented by 2023 as per RC’s recommendation. This also ensures that borrowers are likely to pay cost to broker for service, rather than lender paying for it.
Loan writers will be first time regulated within Future of Financial Advice (FOFA) model as with the financial planners. This ensures every time a product is recommended for borrowers comprehensive statement of advice will need to be handed over and if the product is deemed to be unsuitable loan writer could be sued for not providing suitable product.
Default super account should be managed for all workers, and should be “stapled” to single default account for new members.
If Mysuper account is used then accounts are to be banned from deducting advice fee. Advice fees for non-MySuper account are to be prohibited where applicable. Similarly, heavy handed or hard selling of Superannuation is to be abolished.
A new disciplinary system should be set up for financial advisers, with all advisers required to be registered. A single disciplinary body would oversee the system and conflicted remuneration should be repealed. Cap on life insurance commission is to be reduced to zero over time. All banking licence holders are required to report compliance for both individual advisors to ASIC on quarterly basis.
Heavy-handed selling of insurance products would be banned and funeral expenses insurance policies would be defined as a financial product, bringing it under the over sight of ASIC. Handling and settlement of insurance claims to be defined as financial service as well.
ASIC and APRA, are to be overseen by new independent authority to ensure they are carrying out their responsibility. ASIC supposed to use tougher action on court actions rather than just issuing infringement notices and fines. Also ASIC should provide annual breach notices on companies name rather than the type of breach as is now.
Victims of finance
Compensation scheme to be provided for those who were treated unfairly from financial institutions. The report also suggest on changing the way how community legal group work, to help those who complain. They are to be funded and system to be made more predictable and stable.
Regarding rural banking a national scheme is to be established to mediate farm debts. Similarly, banks would be barred from charging dishonour fee from basic account.
Banking code to be amended to favour people in remote area plus people with poor English skills as well. The report also states that banks are not supposed to charge default rate to loans secured with farm land and in area where natural disaster or drought is declared. Also car dealers should no longer be exempted from national consumer credit protection laws.
Overall, the report has re-confirmed sound credit policy, and systematic regulation overall, and does not address much change with this respect. The most of the process especially within housing credit may not require further alteration and changes than already been in place. However, it does implies those corporate watchdogs needs to be more proactive and functional by introduction of new independent entity to oversee both APRA and ASIC.