| 04.02,19. 04:16 PM |
Banking royal commission report takes axe to sales culture in finance
Photo: Treasurer Josh Frydenberg (right) says the Government is taking action on all 76 of commissioner Kenneth Hayne's recommendations. (AAP: Kym Smith)
Commissioner Kenneth Hayne's final report, and the Government's support for all 76 recommendations, leaves some parts of the financial sector at risk of being effectively legislated out of existence.
Mr Hayne's report was scathing of a sales culture that resulted in poor customer outcomes, and recommended dramatic changes to the payment of mortgage brokers and financial planners that would see many leave the industry, as well as a major overhaul of insurance sales practices, especially for funeral cover.
The commissioner also referred several institutions to the corporate regulator for possible criminal charges around the "fees for no service" scandal, but declined to name names of individuals or companies that might face prosecution.
"Providing a service to customers was relegated to second place. Sales became all important," the commissioner lamented.
"Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards."
In the Government's initial response to the commission's final report, Treasurer Josh Frydenberg said it was taking action on all 76 recommendations, "and in a number of important areas is going further".
"My message to the financial sector is that misconduct must end and the interests of consumers must now come first," he said.
"From today, the sector must change, and change forever."
Mortgage brokers face business-threatening commission overhaul
A key area for change is conflicted remuneration — that is where financial professionals are paid commissions for selling clients products, even though they may not be in the clients' best interests.
To that end, Mr Hayne recommended first a ban on trailing commissions to mortgage brokers.
Next, he wants a ban on banks paying any commissions to brokers, as well as an obligation for brokers to act in their clients' best interests, to be rolled out within two to three years.
But with more than half of all home loans now written through brokers and many smaller financial institutions relying on them for almost all their loan origination, the Government has adopted a watered-down version of this recommendation.
While it proposed brokers be subject to a best-interests duty and for trailing commissions and "other inappropriate forms of lender paid commissions" to be banned from July 1, 2020, it is planning for a review in 2023 about whether upfront commissions should be removed and brokers moved to a "borrower pays" system.
Financial planners in Hayne's firing line
In financial planning, Mr Hayne recommended planners must seek an annual renewal of all ongoing fee arrangements, where clients are sent a list of the services they should be provided and must agree in writing to pay the fee.
This is a key recommendation to avoid a repeat of the fee-for-no-service scandal, where clients, including some who were dead, were charged fees for financial advice that was never provided.
Mr Hayne also targeted the remaining commissions received by financial planners that were not already outlawed by the Future of Financial Advice (FOFA) laws in 2013.
The commissioner concluded that grandfathered commissions allowed by FOFA should be repealed "as soon as is reasonably practicable".
The Government said it would end grandfathered commissions, effective from January 1, 2021.
Additionally, Mr Hayne recommended life insurance commissions should be reduced to zero, unless ASIC identifies a good reason for retaining them.
ASIC should also consider whether commissions are justifiable for the sale of general and credit-protection insurance.
However, while the Government supports ASIC's review into insurance commissions, it has not expressed a view that these commissions should be removed.
The insurance sector is facing the prospect of further restrictions to its sales practices, with Mr Hayne proposing anti-hawking laws be extended to the sector.
Under particular threat are funeral insurers, with the commissioner recommending they be regulated as a financial product.
That would undermine many of the business models in the sector, particularly those that target vulnerable groups such as regional and remote Aboriginal and Torres Strait Islander communities.