Commissioner Kenneth Hayne’s final report has been released. In this note, we summarise the key recommendations, discuss the Government and the Opposition’s response, and reflect on how this will impact Stanford Brown and our client service offering.
Those hoping for blood and gore will be disappointed. The big banks have escaped largely unscathed. Instead it is the mortgage brokers, wealth managers and life insurers who will feel the pain. Hayne’s report is a pragmatic compromise between implementing real change yet protecting the stability of the financial system. He was particularly scathing at the inability of the regulators, APRA and ASIC, to enforce the law. We are unlikely to see a docile regulatory response in future. In fact, ASIC’s attitude has hardened significantly over the past six months. Hayne has passed the baton to legislators and regulators to act on his recommendations, including enforcing existing laws and giving far greater priority to customer needs over profits.
“Let me be clear. Personal responsibility for financial decisions rests with those who make them. However, those who suffer harm as a result of misconduct will have access to redress.”
In opening the report, Hayne laid out four key issues that are central to his recommendations:
- the connection between conduct and reward
- the asymmetry of power and information between financial services entities and their customers
- the effect of conflicts between duty and interest
- and holding entities to account
He pointed out that sales became so important to the banks that all roles merged: “Those who dealt with customers became sellers… Advisers became sellers and sellers became advisers.”
Primary responsibility, Hayne said, must sit with the boards and senior management of the entities concerned, leading to a wider examination of corporate culture and governance.
Hayne recaps the six norms of conduct identified in the Interim Report:
- Obey the law
- Do not mislead or deceive
- Act fairly
- Provide services that are fit for purpose
- Deliver services with reasonable care and skill and
- When acting for another, act in the best interests of the other.
A Summary of the Key Recommendations
The Final Report makes 76 recommendations, of which both the Government and the Opposition have promised to implement in full, with one exception. The Treasurer, Josh Frydenberg, has already stated that the government will not implement the recommendation to ban upfront mortgage commissions due to the anti-competitive impact on the mortgage market. We view this is a sensible position to take as mortgage brokers have not only led to reductions in bank’s lending margins but have enabled non-bank lenders to gain market share. This has resulted in more competitively priced mortgages for consumers. We are mystified why Hayne gave this free kick to the banks.
The law should be amended to provide that mortgage brokers must act in the best interests of the borrower with the latter, rather than the lender, paying the mortgage broker a fee. Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers. Mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
Financial Advice Fees
The law should be amended to ensure that ongoing fee arrangements must be renewed annually by the client, and record in writing the services that the client will be entitled to receive and the total of the fees that are to be charged.
Financial Adviser Disclosure
The law should be amended to require that a financial adviser who would contravene the Corporations Act by assuming or using any of the restricted words or expressions including ‘independent’, ‘impartial’ and ‘unbiased’ must, before providing personal advice to a retail client, give to the client a written statement explaining simply and concisely why the adviser is not independent, impartial and unbiased.
Grandfathered provisions for conflicted remuneration should be repealed as soon as practicable. The Government subsequently announced this would be implemented from 1 January 2021. Grandfathered commissions relate to the Future of Financial Advice Act, legislated in 2013. Banks and their wealth arms have been charging clients commissions linked to financial products. Thankfully this practice will now end.
Superannuation Trustee Obligations
The trustee of an RSE (Registrable Superannuation Entity) should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund.
Retention of ASIC and APRA
The ‘twin peaks’ model of financial regulation should be retained (that is, separation of APRA and ASIC).
APRA, as the prudential regulator for superannuation, is responsible for establishing and enforcing Prudential Standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system
ASIC’s role in superannuation, as the conduct and disclosure regulator, is concerned with the relationship between RSE licensees and individual consumers.
A new oversight authority for APRA and ASIC, independent of Government, should be established by legislation to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects. Graeme Samuel has already been appointed to run this function.
How does this affect Stanford Brown and our Client Service Offering?
Stanford Brown supported the need for a Royal Commission into the financial services industry and we are in agreement with the majority of Commissioner Hayne’s recommendations. The impact will be felt most heavily on Australia’s 20,000 mortgage brokers and on all parts of the insurance industry (the AFR highlighted these two areas as the biggest losers in the Report – see Further Reading below). We already disclose our fees and service offering to our clients in detail. And our latest Client Feedback Survey shows a Net Promoter Score of 72, extremely high by industry standards. But for many advice firms, the need to have clients sign up every year will result in a significant client exodus.
Grandfathered commissions are a tiny fraction of our business (less than 1%) but form the majority of revenues for many financial advice firms. The AFR suggested that grandfathered commissions may account for as much as 70% of AMP’s financial advice revenue.
Stanford Brown offers clients the choice to pay for new insurance policies via a fee-for-service or commission (a fee paid by the insurance company to SB). There are pros and cons to both approaches. However, in the event that the client chooses a commission, all insurers pay the same percentage rate, removing any financial incentives to select one insurer over another.
In short, we welcome Hayne’s proposals and see very little change to our client service offering.
Adele Ferguson writes in the SMH “customers who hoped for blood and gore will be left disappointed”.
Graham Hand in Cuffelinks identifies “The 8 problems the Royal Commission missed”
The AFR highlights the winners and losers ($$)