It has been the thing that everyone in the property and finance industry has been talking about. It has been a while in the making and the 530 final report is finally out. I have had a week to read and review and in this special newsletter I will summarise the report and let you know how it may affect you so that you don’t have to read the 530 pages!
If you have read the report you will know that there has been very little recommendations to increase regulations on the banks. The market has definitely seen the lack of increased regulation as a good thing for the banks hence the huge jump in the banking share price. I think the lack of extra regulation will have a positive effect for investors. The banks will now start to increase market share by pushing money out to borrowers around June – July. Once this happens you will see the property prices in the capital cities outside of Sydney and Melbourne start to increase in value again. People are still earning money and need to invest. The money will once again flow into those undervalued markets.
If you would like to go straight to the summary, please do.
Why was the Royal Commission (RC) undertaken?
For years banks in Australia have been taking advantage of consumers and being able to get away with it. One of the worst hit sectors has been farmers. These guys have really copped a hard time in years past with banks really having the capacity to take people farms at will. But they are only one sector. The RC includes investigations on Superannuation funds, advisors and management and culture of the banks themselves. These guys in many cases have just blatantly broken the law. In fact during the RC there was 10,323 submissions (complaints) against Financial Services providers. The RCs intention was to find these people out and make recommendations on how to correct this and move forward in the right direction.
Key questions
There were 4 key questions that the RC used that “would form the pillars of any comprehensive policy response to what the Commission has publicly exposed”, which were accepted by Commissioner Hayne in the final report:
- How can law be simplified so that its intent is met?
- Should conflicts of interest be removed by banning them by removal or change of the remuneration process?
- What can be done to improve compliance? Increased penalties?
- How can leadership be improved so that those in a position of responsibility act in the best interests of their clients’?
Underlying principles
The RC advises that 6 underlying principals need to be met:
- 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 that other.
Banking
- Mortgage brokers must act in the best interests of the borrower, not the bank providing the loan.
- Lenders should be banned from paying trailing commissions
- Mortgage brokers should be subject to the same laws that apply to financial advisers who provide personal advice, and
Financial advice
- All ongoing fee arrangements must be reviewed annually by the client,
- Financial advisers who lack independence must, before providing personal advice to retail clients, disclose this to the client in writing,
- Grandfathering commissions for conflicted remuneration should be repealed as soon as reasonably practicable,
- ASIC should consider further reducing the cap on commissions in respect of life risk insurance products,
Superannuation
- Trustees of a superannuation fund must not assume any obligations other than those related to performance of their duties,
- Deduction of advice fees from MySuper accounts (other than for intra-fund advice) should be banned,
- Hawking of superannuation products should be abolished,
- Employees should only have one single default superannuation fund, and
Insurance
- The hawking of insurance products should be prohibited,
- The unfair contract terms provisions in the ASIC Act should apply to insurance contracts, and
Culture, governance and remuneration
- All financial services entities should review at least once a year the design and implementation of their remuneration systems for frontline staff,
- All financial services entities should, as often as possible, review their own culture and its governance, identify and deal with any problems identified and determine whether the changes made have been effective,
Regulators
- The ‘twin peaks’ model of financial regulation should be retained,
- Establish a new oversight authority for APRA and ASIC, independent of government, to ensure they are carrying out their responsibilities.
Compensation
- Establish an industry-funded compensation scheme of last resort for those unable to obtain compensation from their financial institution
Summary
What surprises me and I think the overall industry in general is the lack of increased regulation put back onto the banks. In reality there has been no real changes at all. I think the idea that making consumers pay Mortgage Brokers for their services is crazy. This will only serve to increase profits for banks as consumers will refuse to pay brokers. This will therefore reduce competition and favour the big four banks with the branches. The market has definitely seen the lack of increased regulation as a good thing for the banks hence the huge jump in the banking share price.
I think the lack of extra regulation will have a positive effect for investors. The banks will now start to increase market share by pushing money out to borrowers around June – July. Once this happens you will see the property prices in the capital cities outside of Sydney and Melbourne start to increase in value again. People are still earning money and need to invest. The money will once again flow into those undervalued markets.