Banking royal commission’s final report released

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The Australian government announced its support for all 76 recommendations with the release of the banking royal commission’s final report in a response delivered by Treasurer Josh Frydenberg.

“My message to the financial sector is that misconduct must end and the interests of consumers must now come first,” the Treasurer said.

“From today, the sector must change, and change forever.”

The banking royal commission has recommended sweeping changes to the sector. Commissioner Kenneth Hayne’s final report offers 76 recommendations, all of which the Federal Government and Labor say they will support and implement.

WATCH: Treasurer’s response | ABC News

Mortgage brokers should be paid by customers, not banks

Mortgage brokers have a reason to be concerned since the royal commission’s final report has recommended the banking industry move from a commission-based to fee-based model.

Commissioner Hayne says mortgage brokers acting on behalf of home loan borrowers should pay for the bill for the fee — not the banks. 

At the moment, brokers receive upfront and trailing commissions from banks and other lenders, meaning the broker is incentivised to secure the customer a loan — and the size of the commission on offer can influence the broker’s selection of the lender and the size and type of the loans.

Commissioner Hayne recommends a “steady but deliberate” move from the existing model to a model where a borrower pays a fee instead.

The Government says it will ban trail commissions and other “inappropriate forms of lender-paid commissions” on new loans from July 2020, and will conduct a review in three years to consider the implications of removing upfront commissions and moving to the borrower-pays model.

The report also recommends clearing up the question of who the mortgage broker is acting on behalf of.  

While brokers currently receive commissions from banks and other lenders, the commission heard evidence that the reality is, customers believe the broker is looking out for their best interests.

Commissioner Hayne recommends enshrining this in law through a “best interest duty” — breaching this obligation could lead to the broker being hit with a civil penalty.

Mr Hayne’s report was scathing of a sales culture that resulted in poor customer outcomes and recommended dramatic changes to the payment of mortgage brokers and financial planners that would see many leave the industry, as well as a major overhaul of insurance sales practices, especially for funeral cover.

Although the government agreed there was a need to “address” conflicted remuneration in broking, it did not commit to implementing all of the commission’s mortgage broking recommendations in full.

Fees for no service

The final report recommends financial watchdogs consider criminal charges against unnamed organisations linked to the “fees for no service” scandal.

The royal commission heard cases of customers being charged for services they had never received.

The most scandalous of cases involved people being charged these fees even after they had died.

The final report estimated the scandal would cost wealth managers and the major banks $850 million in compensation.

But it has not recommended the banks and wealth managers from being banned from owning advice businesses.

Superannuation

ASIC will become the primary conduct regulator overseeing superannuation.

It and APRA will receive extra power by creating civil penalties for breaches of laws governing superannuation trustees and directors.

The commission has recommended deductions of any advice fees should be prohibited from a MySuper account.

Fees from non-My Super accounts must meet annual disclosure agreements.

Hawking superannuation and insurance products to be banned

Hawking of superannuation products will also be prohibited in a bid to prevent people being sold superannuation products in an unsolicited manner that can lead to people selecting products not in their best interest.

The commission has also recommended the banking executive accountability regime (BEAR), which governs who is responsible when issues arise, should be applied to the superannuation sector.

People should only have one default super fund

There will also be new protections to ensure superannuation fund members only have one default account.

Farms and small business

Farmers have long complained about the treatment they receive from banks and were among the most effective campaigners that lobbied for a royal commission.

The Government has now agreed to create a national farm-debt-mediation scheme that would assist borrowers to address financial difficulties that have caused loans to become distressed.

The Government wants banks to ensure mediation occurs soon after a loan becomes distressed and not as a final measure before lenders take enforcement action.

The commissioner has urged banks to ensure agricultural-land valuations are carried out independently of lenders assessing new loans and consider the possible effect of external events that might be needed to sell the land for a fair value.

The report also calls on banks to ensure distressed agricultural loans are managed by experienced agri-bankers.

It also wants banks to recognise that the appointment of receivers or external administrators should only be a remedy of last resort.

The report calls for the Australian Bankers’ Association to amend its banking code to define “small business” as any business employing fewer than 100 full-time-equivalent employees, where the loan applied for is less than $5 million.

Compensation for consumers

The Government will establish a so-called compensation scheme of last resort to allow consumers and small businesses, who have been failed by financial firms, to have their cases heard.

The scheme will pay compensation where a court or tribunal has ruled in a consumer’s favour, or if the Australian Financial Complaints Authority (ACFA) has issued a determination, but they are unable to get compensation from the financial firm responsible, possibly because the firm has become insolvent.

“This will be a scheme paid for by industry reflecting their obligation to right their wrongs,” Treasurer Josh Frydenberg said.

The Government will also pay $30 million to about 300 consumers and small businesses for unpaid determinations from the Financial Ombudsman Service and Credit and Investments Ombudsman.

Financial industry regulators

The royal commission has recommended retaining the twin peaks model for financial regulation but wants there to be a clearer division between the roles of the regulators.

The Australian Prudential Regulation Authority (APRA) will retain responsibility for prudential regulation, while the Australian Securities and Investment Commission (ASIC) will primarily regulate conduct and disclosure.

Mr Hayne urged ASIC to launch legal action when dealing with large corporations, rather than just issuing infringement notices when they breach laws. He said infringement notices should only be used in administrative matters.

“Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished,” he wrote in his report.

“And wrongdoing is not denounced by issuing a media release.”

Oversight of the regulators

APRA and ASIC will also receive greater oversight with the creation of an independently chaired regulator-oversight body tasked with ensuring the regulators are being held accountable for their actions.

It will report at least twice a year to the minister on the regulators’ performance. The Financial Sector Advisory Council will be disbanded in favour of the new body.

There will be regular reviews of APRA and ASIC in three years’ time when an independent inquiry will investigate how regulator behaviour has changed since the royal commission.

The Federal Court will gain expanded powers to cover corporate criminal misconduct in cases brought by the regulators.

While supporting the changes, the Government insists much of the change needs to come from the regulators themselves.

It says it will work with the regulators to ensure they are “appropriately resourced” and will consider additional funding in its next budget.

If youre buying a car

If Kenneth Hayne gets his way, the days of lucrative commissions for car dealers who sell customers (often useless) add-on insurance could soon be over.

Dealers currently sell products such as tyre and rim insurance on behalf of lenders, often in pressurised sales situations where a customer is trying to lock in a deal on a car or a car loan.

The final report recommends moving to a deferred sales model, meaning customers could think about whether they actually need the extra insurance.

The report says ASIC should cap the amount of commission a car dealer can earn for selling add-on insurance.

Mr Hayne also recommends doing away with the “point of sales exemption”, which currently means car dealers and other retailers do not have to comply with the National Consumer Credit Protection Act.

Changing this would mean dealers and retailers will need to ensure they lend responsibly — not just defer that responsibility to the banks or lenders they are aligned with.


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