The Banking Royal Commission - Effecting change may be easier said than done.
The Australian government were quick to respond to the Banking Royal Commission’s recommendations, but the industry needs more than media headlines and bold statements to effect meaningful change.
The much-anticipated final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission), released on 4 February, contains 76 recommendations which extend to areas across Australia's financial system.
In its initial response, the government was quick to announce that it would adopt all 76 recommendations. But perhaps this was a little hasty? The government could not have been in a position at that time to fully and precisely understand what is to be involved in adopting each of the recommendations and addressing issues that flow from that. Nevertheless, the Banking Royal Commission uncovered significant misconduct and wrongdoing, and this needs to be addressed.
Since the Global Financial Crisis, Australia has seen more than 20 inquiries and reviews into various aspects of the financial system. Little has changed. The Royal Commission has focused on the culture of the financial services industry and has identified regulatory, compliance, and conduct risk as requiring necessary and urgent change.
One key area identified by Commissioner Hayne as needing change is the commission structure paid to brokers. He has recommended trailing commissions to mortgage brokers be banned, and life insurance commissions be reduced to zero. The report has not though, sought to understand the genesis of the trail commission, how they came to be, or what a suitable and sustainable alternative is - I am not opposed to the concept of a fee-for-service structure, however a lot of work needs to be done to ensure that it is a level playing field, and the commission structure for brokers needs to be fully understood before this can happen.
There is a lot of misinformation in the market about trail commissions and other commission structures.
A key area needing change as identified by the Banking Royal Commission’s final report is the issue of rewarding advice provided by finance professionals given when a conflict of interest exists. It has referred to the conflict of interest where finance professionals are paid commissions from product providers – often banks and insurance providers – in return for giving advice and selling products to consumers, even when the advice and product is not in the consumer’s best interest. Provided the product is sold, the commission gets paid – irrespective of the quality of the advice to the consumer. On its face, this seems fair. However, this does not accurately reflect the reality of the mortgage broker-customer relationship, nor how the fee structure actually operates (it does not, for example, address the claw back rights that exist, to the detriment of the mortgage broker).
The government was quick to promote a position of being on board with Commissioner Hayne’s recommendations, then took a side step suggesting they will put a hold on any changes to trail commissions for 3 years. Then what? What is the government going to do during this time? And what are mortgage brokers supposed to make of this in the meantime?
The government needs to take steps to understand why trail commissions were introduced in the first place, it needs to fully explore the concept of the conflict of interest and how it arises, consider possible alternatives, and significantly, it needs to turn its attention to consumer outcomes – that is, consumer literacy and the asymmetry of power between banks and consumers.
If the commission structures for mortgage brokers is not fair and sustainable, and if trail commission is abolished without an appropriate and robust alternative, there will inevitably be many brokers who are unable to continue to operate. What does this mean for the livelihood of these brokers? What does this mean for the reduced access to brokers by consumers? Many consumers will be left in a position where they must deal directly with the product providers – the bank. That is simply not good enough when the issue of asymmetry of power between the bank and the consumer has not been dealt with.
Tracey Mylecharane - Solicitor
Tracey Mylecharane has more than 12 years’ experience in legal practice and has developed considerable knowledge of business and commercial law issues. She has acted for small and medium businesses across several industries and has been able to assist clients with a vast range of issues from start-up structures and systems, supplier and third-party contracts, to partnership break-ups and dispute resolution (both in and out of court).