With the results of the Hayne Royal Commission now available for all to see (final report here), fund managers, journalists, and bankers everywhere are scrambling to absorb the biggest impacts. Here, I'll summarize some of the key findings from my initial glance at the report (spoiler alert: the mortgage broking industry is hit hard)
Is the broking industry broken?
The recommendations would likely shake up mortgage broking more than any other section of the industry, if implemented. This is a big caveat, as Treasurer Josh Frydenberg has stated that they'll only accept a watered down version of these recommendations that would leave brokers subject to the Best Interests Duty, but would postpone or forego switch to a user-pays system.
- Best interests duty - mortgage brokers to be subject to the same obligation as financial advisors
- No commissions - the report recommends that mortgage broking switch to user-pays, rather than the lender-pays system that currently exists
- Brokers as advisors - though it allows for a "period of transition", brokers will eventually be subject to the same regulations and laws as financial advisors providing product advice to their clients.
Stocks affected: Mortgage Choice (MOC), Yellow Brick Road (YBR), all the banks.
Major changes for financial advisors
While there are no major surprises here, some of these changes will have significant impacts on advice businesses large and small. Many of the suggestions here are common-sense (e.g. pre-employment reference checking), while others are just overdue (e.g. removal of grandfathered commissions - it's been five years since the Future of Financial Advice (FoFA) reforms).
- Fee arrangements - any ongoing fee arrangements need to be renewed annually, and they must state the specific services to be provided. No fees can be charged without specific permission
- Possible removal of the Safe Harbour Provision - when the FoFA reforms were introduced, they included a requirement to act in the best interests of the client. Part of this included an eight step process that should ensure that requirements were met. However, many advisors have complained that it creates a significant compliance burden, without actually reducing the ambiguity of the requirements. The commission recommends a review of the quality of advice in three years time, which would include the potential removal of the Safe Harbour Provision
- "Indepedent" financial advice - Advisors will be required to provide a written disclosure statement to clients warning of a lack of independence
- Grandfathered commissions - grandfathering of old commission arrangements to be repealed "as soon as is reasonably practicable"
- Life insurance commissions - reduce, and ultimately remove conflicted life insurance commissions
- Reference checking - all AFSL holders will be required to check references of advisors
- Reporting - "serious compliance concerns" about advisors must be reported to ASIC quarterly.
Stocks affected: AMP Limited (AMP), IOOF Holdings (IFL), Fiducian Group (FID), the Big Four banks.
Getting harder to sell Super
Many of the changes recommended for superannuation revolve around restricting sales and marketing. It will be interesting to see how these changes affect new member acquisition, as most funds currently rely on methods that would no longer be allowed under the recommendations. Many Industry Funds, for example, employ large teams of Business Development Managers whose roles largely consistent of acquiring new employers to use them as their Default Fund, the recommendations would seem to outlaw this.
Importantly, the suggestion of a panel of the "best of the best" funds to be selected by an indepedent panel has not been included in the recommendations.
- No hawking - a blanket ban on all unsolicited selling of superannuation products
- No more special treatment for employers - any act that has the purpose of getting an employer to nominate a particular fund as their default will be banned
- Trustees get a shake-up - superannuation trustees will not be allowed to hold any other role or office other than those arising from their role as the superannuation trustee. A large number of trustees currently sit on multiple boards and/or hold other positions
- One default account - the report recommends implementing a system to ensure that nobody holds multiple default accounts.
Stocks affected: AMP Limited (AMP), IOOF Holdings (IFL), the Big Four banks.
- No hawking of insurance products - similar to superannuation, no unsolicited offers of insurance products will be allowed
- Removal of funeral policy exemption - funeral policies are currently excluded from being defined as a financial product. The commission recommends removing this exemption.
Stocks affected: Freedom Insurance Group (FIG), Steadfast (SDF), Commonwealth Bank (CBA), ANZ Bank (ANZ), IOOF Holdings (IFL), AMP Limited (AMP), IAG Limited (IAG), Suncorp (SUN).
- Fees for no service - the Commissioner clearly stated that a jury should decide whether individuals involved with the fees for no service scandal should be held criminally liable. Escaping liability appears to rest on the "existence of some unarticulated and unsupported claim of right" to take money.
Stocks affected: the Big Four banks, AMP Limited (AMP), IOOF Holdings (IFL).
Other interesting tidbits
- Point of sale exemption - it might surprise you to learn that car dealers were exempt from the provisions of the National Consumer Credit Protection Act (NCCP). The commission recommends this best be rectified.
- Businesses to remain exempt - small businesses are also exempt from the NCCP, and will remain that way.
At more than 500 pages long, and with dozens of recommendations there are no doubt some key ones I've missed. However, these are the ones that stood out to me as most likely to get headlines in the coming days.
If there are any stand-out recommendations or affected stocks that you think I've missed, let us know in the comments below.
EDIT: The Federal Government has announced that it will not accept the full crack down on mortgage broking for fears of harming competition.
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Thank you Patrick. Excellent wrap up of the main points. Love your work
Thanks Patrick - certainly has less teeth than it could have. From a banks perspective, Westpac should benefit most given the green light for continued vertical integration + they have a big branch network which should help them with selling mortgages. Mortgage brokers a big loser - the gravy train has stopped!
There’s no point changing regulations and rolling out new ones if our regulators are not prepared to enforce them. I doubt very much that, despite all the froth and bubble over this Royal Commission, not one person will face any serious criminal penalty and the morally corrupt circus that is our Banking and Financial Services Industry will roll on, with a token clown replaced here and there.🤡
Excellent precis, thanks, Max
Thanks for the comments everyone. James - it's interesting to see the varying reactions to the recommendations. Personally I thought they were quite thorough and sensible. I'm not sure destroying vertical integration would've been the silver bullets that some people were hoping for. Grant - it's worth noting that some of the recommendations specifically address the issues around enforcement and the regulatory, and Hayne did recommend that offenders in the Fees For No Service scandal face a jury trial.
The Banks were prepared to spend big to buy an income stream(Life and Super Companies) which offered big growth in profits. Nothing wrong with this lets face it most public Companies are there to make money. However, the Banks never understood the Superannuation Industry,as they still had their Banker hats on? Its never worked,as shown in the results from these investments. Then,Senior Management and Boards began incentivising/Remunerating on sales,sales sales. In addition, if they had done their job properly there would have been no need for mortgage brokers( or any brokers in fact.) If I am too busy to cut my lawn I pay someone to do it. If I want a broker I should pay for that too, if I'm time poor or too lazy. Then the broker works for me?