This month, the findings of the damning final report from the Banking Royal Commission into the financial services industry were handed down. High Court justice and royal commissioner Kenneth Hayne unveiled 76 recommendations for key aspects of the banking, superannuation, financial advice, and the rural lending industries.
While the final report totals 530 pages, a quick summary of the recommendations is provided below:
- Require borrowers rather than lenders to pay the mortgage broker for their services.
- Lenders would be banned from paying trail commissions to mortgage brokers for new loans.
- Appointment of receivers on a farm loan is a last resort.
- Car dealers should no longer be exempt from national consumer credit protection laws.
- Create a new disciplinary system for financial advisers, and all to be registered.
- The current cap on commissions for life risk-insurance products should be reduced and ultimately set at zero.
- Conflicted remuneration exemptions should be referred and eventually banned outright.
- A single default super fund for all workers.
- Heavy handed selling of superannuation to be abolished.
- Heavy handed selling of insurance products to be banned.
- Funeral expense insurance policies would be defined as a financial product, bringing it under the oversight of ASIC.
- A cap on the commission that can be paid to car sellers for add-on insurance products.
- Retain ASIC and APRA but have them overseen by a new independent authority that would assess the two regulators to ensure they are carrying out their responsibilities.
The Impact to Borrowers
The Government is looking to take on all 76 recommendations, however, those around broker remuneration have not been adopted in full. Trail commissions will be banned for new loans from 1 July 2020, however a “further review” will be conducted in three years on the implications of removing upfront commissions and moving to a borrower-pays remuneration structure.
The move to a consumer paid model could be devastating to the industry, and reduce competition. In the recent Consumer Access to Mortgages Report from Momentum Intelligence, it was found that while the vast majority of borrowers are satisfied with their mortgage experience when using a broker, most would be unwilling – or unable – to pay a fee of $2,000 for their service if it were mandated.
The recommendations on mortgage brokers will potentially represent a big win for the big four banks. Smaller lenders will no longer be able to compete on a level playing field, increasing the bank’s power and making it more expensive and more difficult to get access to a home loan.
Car dealers being no longer exempt from NCCP is a great win for consumers, as they will need to abide by the industry standards when consumers apply for credit, ensuring they can actually afford the loan they are applying for, hopefully leading to an industry clean up.
In the Financial Advice, Superannuation and Insurance sectors, the changes recommended should improve consumer outcomes whilst improving industry integrity though improving consumer financial capability is still crucial in ensuring they make informed decisions for all financial products.