An overview of the financial services royal commission

The political response

Treasurer Josh Frydenberg has confirmed the Federal Government will consider each of the recommendations, with the clear intention to act to change the sector in the interest of consumers.

The Labor party also supports Hayne’s report, and has committed to act faster than the current government, suggesting that 75 of the royal commission recommendations would be implemented in full.

Labor does not support Hayne’s recommendation for a consumer-paid broker model – and this the lack of support comes as a relief to the mortgage broking industry.

Labor has also indicated it would:

• impose a fixed percentage upfront fee for brokers that would eliminate conflict of interest that comes from different lenders offering different commission rates
• seek to maintain competition in the banking sector
• work to establish a victim compensation package.

The impact of Commissioner Kenneth Hayne’s report is now subject to the government successfully bringing forward legislation changes to enable adoption of the recommendations, which relate to six key financial services sectors:

1. Financial advice

Commissioner Hayne focussed on three different issues that emerged from the commission in relation to the provision of financial advice:

• Fee for no service, where ongoing advice fees have been charged even though no advice has been provided to the client
• Poor advice resulting in poor outcomes
• The fractured and ineffective disciplinary system for financial advisers.

In response, Hayne’s made the following key recommendations:

• Annual renewal and payment: Any ongoing service fees must be renewed annually by the client, and the adviser must issue written confirmation each year detailing the actual services the client will be entitled to receive and the total fee that will be charged for their services.
• Disclosure of lack of independence: Before providing personal advice to a retail client, the adviser must provide the client with a written statement clearly explaining why the adviser is not independent, impartial and unbiased.
• Measures to improve quality of advice: A follow up review should take place in three years’ time, involving Government and ASIC, to measure the effectiveness of measures implemented. Additionally, the newly introduced education and professional standards reform of the Financial Adviser Standards and Ethics Authority is not to be fully implemented until the final review is implemented in 2022.
• Grandfathered commissions: Grandfathered provisions for conflicted remuneration are to be repealed as soon as possible.
• Life risk insurance provisions: In 2017, the Government enacted reforms to life insurance remuneration that capped the commissions a financial adviser would receive for providing advice in relation to the purchase of a life insurance product. ASIC will conduct a further review on this matter in 2021. If the ASIC review does not identify significant improvement in the quality of advice, then the Government would move to mandate level commissions.
• Reference checking and information sharing: Information shared between AFSL holders and ASIC will ensure that compliance issues with individual advisers are identified, investigated and action taken where necessary.
• Reporting compliance concerns: There will be efforts made to formalise and improve existing breach reporting by AFSL holders to ASIC, where there are serious compliance concerns about an individual adviser.
• Misconduct by financial advisers: AFSL holders should be required, as a condition of their licence, to take specific steps when they detect that a financial adviser has engaged in misconduct when providing advice to a retail client. The AFSL holder  should determine the nature and full extent of the adviser’s misconduct. If misconduct is proven, then the AFSL holder would be required to notify affected clients and remediate those clients promptly.
• New disciplinary system: The report recommends the law be amended to establish a new disciplinary system for financial advisers. This would require all financial advisers who provide personal financial advice to be registered and be subject to a central disciplinary body, and also allow clients and other parties to report information about the conduct of financial advisers to the disciplinary body.
• Remuneration of front-line staff: Financial service entities would be required to review their remuneration system for front line staff on an annual basis (as a minimum).

2. Superannuation

Hayne’s superannuation recommendations aim to ensure that superannuation products are in line with the needs of consumers and that all systems in place aim to reduce lost accounts, reduce erosion of accounts by fees, and place the interest of members above all others.

• No other role or office: The trustee of a registerable superannuation entity (RSE) should be prohibited from assuming any obligations other than those arising from its performance of the duties of a trustee of a superannuation fund. This measure is to remove the conflict of interest of trustees, where the entity acts as a trustee for both the superannuation fund and the managed investment scheme (MIS). This situation creates a direct conflict between what is in the best interest of the members of the fund, and the entity’s financial and shareholder interests in relation to the MIS.
• No deducting advice fees from MySuper account: The report recommends that the deduction of any advice fee (other that for intra-fund advice) from a MySuper account be prohibited. Intra fund advice refers to the provision of advice that is not personal advice.
• Limitations on deducting advice fees from choice accounts: The deduction of any advice fees (other than for intra-fund advice) from superannuation accounts (other that MySuper accounts) should be prohibited unless the requirements regarding the annual renewal and prior written identification of services to be provided to the client have been agreed.
• No hawking: Hawking of superannuation products should be prohibited to retail clients.
• One default account: A person should have one default account. A system should be developed for “stapling” a person to a single default account. A significant barrier to consolidation of superannuation is the lack of portability of insurance individuals may hold inside their superannuation account.
• No treating of employers: Section 68A of the SIS Act should be amended to prohibit trustees of a regulated superannuation fund to provide non-monetary benefits (such as entertainment, tickets and sporting events etc) to entice employers to nominate the fund as their default fund.
• Civil penalties for breach of covenants and like obligations: This recommendation aims to enhance the accountability of trustees and directors of superannuation funds.
• Adjustment of ASIC and APRA’s roles: The roles of ASIC and APRA with respect to superannuation should be adjusted including clarifying the regulators’ roles and powers, including their respective areas of focus.

Hayne’s insurance recommendations aim to bring the regulation of insurance in line with that of other financial products and to better balance the rights and obligations of insurers and client with insurance policies.

• No hawking of insurance: Hawking of insurance products should be prohibited. The definition of hawking will be clarified to include the selling of financial product at a meeting or a call or other contact initiated to discuss an unrelated financial product.
• Duty to take reasonable care not to make a misrepresentation to an insurer: The purpose of this recommendation is to flip the responsibility of pre-contract disclosures from the consumer onto the insurer.
• Avoidance of life insurance contracts: It is recommended that Section 29(3) of the Insurance Contracts Act should be amended so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms.
• Removal of claims handling exemption: The handling and settlement of insurance claims, or potential insurance claims, should no longer be excluded from the definition of “financial service”. Inappropriate claims handling practices can cause significant consumer detriment highlighted by the round six hearings into insurance.
• Enforceable code provisions: Recommends the law should be amended to provide enforceable provisions of industry codes and for the establishment of mandatory industry codes.
• Extension of the sanctions power: Treasury, in consultation with industry, should determine the practicability, and likely pricing effects, of legislating universal key definitions, terms and exclusions for default MySuper group life policies.

4. Mortgage brokers

One of the key themes of Hayne’s recommendations is to require mortgage brokers to act in the client’s best interests.

The report from Commissioner Hayne calls for upfront commissions to be banned and replaced by a customer-paid fee. The report concludes that the borrower, not the lender, pay the mortgage broker a fee for acting in connection with home lending.

The report also recommends that trail commissions arrangements, paid by the lender to the mortgage broker over the life to the loan, also cease with the government indicating it will move to ban trailing commissions from July 2020.

5. External dispute resolution and consumer compensation

It is the clear view of Commissioner Hayne that the law should also be amended to obligate AFSL holders to take reasonable steps to cooperate with AFCA (replaced FOS 1/11/2018), in its resolution of particular disputes and the consideration of the potential design of a compensation scheme of last resort .

• Cooperation with AFCA: Section 912A of the Corporations Act to be amended to require all AFSL holders take reasonable steps to co-operate with AFCA in its resolution of particular disputes, including making available all relevant documents and records relating to issues in dispute.
• Compensation scheme or last resort: Hayne recommends the establishment of a forward-looking compensation scheme of last resort (most likely to be industry-funded).

6. Codes of practice, regulators, culture

• Enforceable code provisions: Hayne recommends law is amended to provide ASIC with power to approve codes of conduct relating to all APRA regulated institutions and ACL holders.
• Changing culture and governance: All financial service entities should, as often a reasonably possible, take proper steps to assess the entity’s culture and its governance, identify any problems with that culture and governance, deal with those problems and determine whether the changes it has made have been effective.
• ASIC’s approach to enforcement: ASIC should adopt an approach to enforcement that takes as its starting point the question of whether a court should determine the consequences of a contravention and recognise that infringement notices, such as Enforceable Undertakings, should principally be used in respect of administrative failings. The issue of Enforceable Undertakings has been ineffective in dealing with systematic breaches.
• Application of the BEAR to regulators: It has been recommended that APRA and ASIC should internally formulate and apply its own management accountability principles to the core tenets of the BEAR.
• Regular capability reviews:  APRA and ASIC should each be subject to a review at least every four years, this would represent an opportunity to consider the operational abilities and requirement of the regulators, and assist identify resource and capability gaps.
• A new oversight authority: A new oversight authority has been recommended for APRA and ASIC, this authority would be independent of government. This authority would be established by legislation to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects.