With a great deal of anticipation and no small amount of speculation, Commissioner Hayne has released his findings and recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
He has made 76 recommendations and other than one point in regards to mortgage broking, both of the major parties have said they will accept and implement them.
Large portions of these recommendations relate to banking and lending but there are a number of recommendations specifically relating to financial advice. There will be some tinkering before this is passed through parliament and whilst we do have an election to get through, our view is that the intent will stay the same.
Let go straight to the more impactful items when it comes to advice.
Financial advice fees – some more paperwork
We currently provide a summary of advice fees and services to you each year and every two years we ask you to ‘formally’ agree to continue using our services. Evalesco has no issue with this, though a few of our clients find it frustrating as we also disclose this every time we see you and in every advice document we provide to you.
The new regime is to still provide the annual statement and ask you to formally agree (Opt-in) to our services each year rather than every two. Not a huge impost but more paperwork.
We are currently reviewing the best way of doing this without cluttering up your inbox and in many cases, will move to an annual fee arrangement. When we meet with you, we will have the necessary paperwork in the meeting and if you are happy to continue using our services, we will lock it in for the next twelve months, rather than in arrears. We have always tried to be absolutely transparent here and would prefer to be pro-active, rather than reactive.
Financial adviser disclosure – yes, more disclosure!
Evalesco and our licensee, Australian Advice Network (AAN) are privately owned – we have no affiliation with any product provider, no ownership or equity relationships and receive no hidden payments. Our fees are fully disclosed as per above and there is nothing you do not know about. We cannot call ourselves ‘independent’ under the Corporations law definition as we do receive commissions from insurance providers. With insurance, we are happy to charge a fee and rebate any commissions back to clients but that doesn’t suit everyone. We ask clients which method they prefer, and many prefer the commission versus writing a cheque. Every company pays exactly the same commission rate and we do not receive any benefits other than the commission so it is hard to argue we are conflicted in where we place your insurances. We choose our providers based on benefits, claims experience and premium, in that order. Any commissions are fully disclosed in your advice documents.
The Royal Commission’s recommendation is that we provide you with this disclosure every time we meet so this will be something to look forward too.
These are commissions paid from within investment platforms. This is really a legacy issue from older life company products, employer super and some of the ‘no frills’ platforms. They should really have gone by the wayside back in 2014 but there are still some out there.
We still have a small number of clients come in with these products and if it’s in the client’s best interest we will recommend alternatives.
We support the removal of these and would be happy if they brought the suggested implementation date of 1 January 2021, forward.
This area has been hit very hard and we have concerns for the consumer impact and services that will be reduced in this area.
The initial recommendation is adding a ‘best interest duty’ for Brokers, like the duty Financial Advisers and Lawyers have to abide by. No real issue here and we would argue, we already demonstrate this.
The concerning piece is the removal of all trail commissions for Brokers and entrenching a much larger upfront fee that will be charged by either the banks or the Brokers depending on where your loan is sourced.
When the broking system was first introduced, it was about banks outsourcing their lending areas. They shut branches and sent their managers out as mobile lenders and ‘Brokers’. This saved the banks money and to compensate the managers they provided a commission structure that provided some upfront fees and then ongoing fees to make sure the Brokers provided the service that the banks had withdrawn. Over time, Brokers became more independent and now have access to a large number of lenders. It could be argued this has frustrated the banks as they lost control over the placement of loans.
Commissioner Hayne has recommended the removal of all trail fees for Brokers and we are concerned that this will lead to poor consumer outcomes. It is very likely that most of the 17,000 plus Mortgage Brokers in Australia and their staff will go out of business and the only option for most consumers will once again be the big banks.
As you know, at Evalesco we provide mortgage broking services to our financial advice clients. We believe we are positioned to adapt to any enforced changes and continue to provide good outcomes for our clients in respect of their mortgage needs, as a part of our holistic service. Which is good news. However, it is unlikely to be viable to provide mortgage broking as a stand-alone service. We are struggling to see how this helps consumers and it looks like a huge windfall for banks, when it was their poor behaviour that has led to these changes.
In summary, the Royal Commission uncovered behaviours we were not aware of and has firmly put institutions on notice that these must stop. The changes within financial advice are probably necessary (though cumbersome) to make sure large bank aligned licensees are held to the same standards as the privately-owned groups.
If this provides better outcomes for consumers, then we support the recommendations and by and large, we believe it will. The jury is still out on the changes to Mortgage Brokers and we will have to see what the final landscape looks like before we agree these measures have met this fundamental test.
As always, we are here to help. If you have any queries on this or any other topic, please do not hesitate to contact us.