Few Bad Apple Ruining The Bunch
After 12 months and $75,000,000 spent by the government (i.e. funded by tax payers), Haynes Royal Commission put out their final recommendations to the Australian Financial Advice and Services industry. Some of the winners and losers (as summarized by AFR) with commentary:
Winners
Big Banks: Banks won on multiple fronts. One, the report made no change to vertical integration. What does it mean? It means that the bank can still manufacture a financial product and sell you the product under general advise, except that they don't have to pay financial advisers to do so anymore, recouping any commission to themselves. If you would like an independent advise to see if this suits you, then you'd better pay the adviser out of your pocket. You can't afford it? Well, that's not what Haynes commission concerned about. Two, banks continue to use "household expenditure measure" as the basis for making loans without any expansion to how they asses the suitability of borrowers. Oh, and they don't have to pay mortgage brokers trail commissions anymore. But how I am going to assess the best bank loan deals among thousands of products? Isn't it banks can see what other loan inquiries I have made and treat me unfavorably? How can I bargain with the banks on rates and fees? Well, that is also not our Commissioners concern. You see, bank are not licensed to provide you with personalised answers, so consumers are left on their own.
ASIC: There has been no change to the twin peaks model of regulation and the corporate regulator has had its powers expanded to include superannuation. Twin Peaks model is an Australian approach where ASIC and APRA assumes segregated independent responsibilities of the market with equal importance. ASIC is responsible for good market conduct and consumer protection, and APRA is is responsible for financial system stability.
Consumers: The government will establish a compensation scheme of last resort going back 10 years, instead of 6 years; and provides $30 million for past claims of misconduct. i.e. Tax payers will put aside another $30 million to fund the mis-behaviors of financial cow boys, and hope the perpetrator will be punished properly eventually.
Losers: (the list is twice longer and you'd probably knows one or two of these people in your lives, because they are small business people)
Mortgage brokers: The government has not adopted the report's proposal to ban commissions for upfront commissions for mortgage brokers. But it will move to remove trail commissions and Labor has indicated it supports the Hayne reforms. Brokers also face a new best interests duty and possible regulation as financial advisers. The potential consequence is that many mortgage broker will have to raise the upfront commission rate and if it turns to borrowers pay model, many borrowers may not be able to afford the payment giving banks an upper hand to charge higher interests and fees.
Retail super funds: Trustees banned from acting in other roles; prohibited from inducing employers to use their default funds;
Insurance brokers: Face the loss of commissions on life and general insurance products, as well as banning "hauling phone calls". Although the predatory phone sales model is commendable, this is another area with complex products and claim processes that consumers would have to arm themselves to deal with.
Financial advisers: Those who provide personal advice will have to be registered and the industry faces a central disciplinary body. Financial Advice industry has gone through dramatic changes after the FOFA review. The grandfathered commission model is going to be abolished by Dec 2021.
APRA: Faces a capability review every four years, the first to be led by Graeme Samuel; it has also been told to better share information with ASIC;
Car dealers: Face a cap on commissions for add-on insurance sales
Overall
Banks are bruised from the humiliating public inquiry but their money churning business model is unshaken, if not strengthened from eliminating commissions to smaller intermediaries (e.g. mortgage brokers) and less transparent competitions.
Consumers, the protected, can expect to pay more for their "safety" and better start learning some complex financial literacy on your own so you can bargain with the giant banks. Although this is always the best way for someone to make informed decision, the task has just got a lot harder without help. Good luck with that.
Another classic case of righteous reaction to "one bad apple" ends up ruining the bunch.
Disclaimer:
This article does not create an advisor-client relationship. The comments, opinions and information included in this article and expressed by its author is general information only, and has not taken into account of anyone’s personal situation. You should always consult with your adviser.
