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 contentious point in regards to mortgage broking and up front commissions, 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 we do have an election to get through but I think we can assume the intent will stay the same.
The big ticket items!
Financial Advice fees – some more paperwork
So, currently we 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. RFS 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
RFS and its 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 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 in 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.
An example would be an old employer superannuation fund where contributions have a 3% fee on them. We still have clients come in with these and it is a simple matter to remove them but you have to know you can remove them.
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, similar to the duty Financial Advisers and Lawyers have to abide by. No real issue here and the Brokers we deal with, we would argue, 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 and the Brokers depending on where you source your loan through.
When the broking system was first introduced, it was 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 this does seem to lead to poor consumer outcomes. It is very likely that the 17,000 plus Brokers in Australia and their staff will go out of business and the only option for consumers will once again be the banks. We are struggling to see how this helps consumers and this looks like a huge windfall for banks, when it is their poor behaviour that has led to these changes?
Having worked closely with Brokers over many years, RFS appreciates the work they do for our clients and the 24-hour service many of them provide. We do not see the same level of service from large retail banks.
In summary, the Royal Commission uncovered behaviours that disappointed us as much as you. The institutions are on notice that this has to stop. The flagged changes within financial advice are necessary (though cumbersome) to make sure large aligned licensees are held to the same standards as the privately owned space.
If this provides better outcomes for consumers, then we support the recommendations and by and large, we believe it will. Our 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 this has 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.