There’s no doubt that the Royal Commission hearings were shocking and cathartic at the same time. The stories of disgraceful behaviour surprised even the most hardened of critics. With this backdrop, most of us expected the final report to be harsh in its recommendations for change. Instead, Commissioner Hayne has highlighted cultural shortcomings and called on the regulators to enforce higher standards.
From a broad perspective the final report is positive with many of the recommendations targeted at fairer lending practices for small business and rural communities. It also targets less regulation but better enforcement.
In respect of financial advice and consumer lending, Commissioner Hayne has fallen well short of consumer expectations, and in some areas, missed the point altogether.
Banning Grand-fathered Commissions
An important recommendation from Commissioner Hayne is the banning of grand-fathered commissions. These are the trailing commissions, built into products, that have been part of financial planning for decades. These trail commissions are paid to the adviser to keep the product in place and represent a clear conflict of interest. There’s little incentive for an adviser to upset the cart when the money just keeps flowing in. Representing 30 per cent of adviser incomes, mainly from outdated products, trail commissions are inconsistent with a modern advice practice.
Capital Partners view:This is an important reform. No consumer should pay a fee for a service they don’t receive. Where there is an active advice relationship in place, there should be no difficulty in moving to a fee for service arrangement. For Capital Partners, we do not receive grand fathered commissions and so the proposed reform will have no impact on us.
Bank Financial Advice
Some of the worst behaviour in the Royal Commission related to financial advice and product sales by the banks. This behaviour has been widely criticised, and many commentators called for the separation of product and advice.
As former prime minister Paul Keating said in last week’s Australian, “The royal commissioner should have recommended these arrangements …be prohibited. This he monumentally failed to do.”
We call this the Royal Omission.
In a positive move, Commissioner Hayne has called for reform that would inform consumers in advance whether the financial advice they were about to receive is “independent” or “restricted.” Modelled on the UK system, this could be a positive change.
Capital Partners view: The manufacture of financial products and true financial advice will never belong together. At the core of financial advice is a fiduciary responsibility – to do the best possible for a client. Banks are sales organisations that give ‘advice’ on their own products. Sadly, Commissioner Hayne’s oversight will see mis-selling of financial products continue.
Life Insurance Commissions
Commissioner Hayne has recommended a review of whether commissions should be paid on life insurance products. Advice on life insurance products did not come under considerable scrutiny during the Royal Commission – most of the criticism was reserved for the insurance companies and their approach to paying claims.
Under-insurance remains a significant problem in Australia, so any change needs to take this into account. Under recent changes, commissions have been reduced and this is a step in the right direction.
Capital Partners view: Commissions are rarely the best form of remuneration for advisers – the risk is that the commission incentive drives a sales culture. That said, professional advisers can and do manage this conflict effectively. In an ideal world, life insurance would operate on a fee for service basis and this is the model that will need to evolve.
In a bizarre twist, Commissioner Hayne has rewarded the Banks with a $3billion plus windfall by banning commissions on mortgages originated by mortgage brokers. While mortgage broking has flourished, banks have dismantled their bricks and mortar branch network, further increasing their profits.
Shopping around for the best mortgage rate and structure is time consuming so there’s undoubtedly a valuable service to be had here, but the cost of originating the mortgage should not be borne by the consumer – it is very clearly the bank’s cost.
If one could rely on walking into their bank and getting the best deal, brokers wouldn’t exist. We regularly see examples of banks charging loyal, long-term customers well above the going rate on their mortgages.
Like so many other situations highlighted by the Royal Commission, if the banks did the right thing by their customers, mortgage brokers probably wouldn’t have a business model.
Capital Partners View: Mortgage brokers do offer a valuable service that consumers place a value on. That’s why more than 70 per cent new mortgages are broker initiated. Sadly, Commissioner Hayne’s commission ban will inevitably lead to less competition in turn higher mortgage interest rates.
While some aspects of the final report were disappointing, the overall impact of the Commission process has been positive. With so much dirty washing on display, we can only hope the behaviour of financial institutions will improve in the future. The past has shown that there’s been too much of “can we get away with it?” This behaviour needs to be replaced with “is it in the client’s best interest?”
While there’s nothing we need to respond to immediately, there’s always opportunities to learn. Far from feeling smug, we at Capital Partners are looking at the Royal Commission as an opportunity to improve and grow.
Please share your thoughts with us. If you have any questions, please contact us at email@example.com, we will be happy to respond.