Banking Royal Commission - Did They Miss The Point?

Andrew Thomson - General Manager

So after 12 months, 68 days of hearings, 130 witnesses and in excess of 10,000 public submissions, the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has now concluded.

Andrew Thomson - General Manager

While the fallout for the banks in terms of public relations and enhanced scrutiny thanks to underwhelming performances on the stand from senior figures and a myriad of allegations and confirmed misconduct will be long lasting, if anything from a structural and penal point of view, they seem relatively unscathed compared to the untold damage likely to be done to a swathe of small business should some of the recommendations of the report be upheld.

This view is probably best supported by the fact that all major banks enjoyed a good bounce on the ASX after the report and recommendations were tabled, showing that the markets felt banks went relatively untouched despite the extensive misconduct and unethical behaviour uncovered during the process.

Humiliating as the process may have been for both individuals involved and the wider culture of the sector, the major pillars of the banking system remain untouched. The potential for forced separation of banks and dealer groups involved in delivering financial advice didn’t rate a mention, nor did the likelihood of enforceable policy on banker remuneration arrangements come up anywhere in the report.

In fact, you might begin to wonder which part of the humiliating process lead to any sort of change for the environment in which the banks operate, other than some ill-thought recommendations that will merely create a new environment where their dominance is enhanced.

This overarching belief and ideology that commissions can’t be earnt in an ethical and regulated environment puts the entire mortgage broking industry at risk, not to mention the financial planning sector. Mortgage broking is an industry that over the last 20 years has take over 50% of the market share for all new mortgages, and dismantled the dominance of the big four by (at least more often than not) recommending the most appropriate product for their client needs. The suggestion to cut either up front or trail commissions (or both!) to mortgage brokers is yet another potential policy with that will have untold collateral damage. Further suggestion that a customer would willingly pay a mortgage broker for their services is the height of naivety and quite simply idiotic - just ask the many financial planners out there how fee for service is working out for them??

Do those behind the recommendations expect brokers to simply work for free? If the concern is that brokers recommend the incorrect products based on the commissions paid, wouldn’t a standardised industry commission structure be a better solution, than simply removing the only source of income for an entire industry?

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If the current recommendations were all implemented, as promised by the ALP if they win government, then the first casualty is the mortgage broking industry and the major banks then secure greater dominance of the market as a result. We have to remember that mortgage brokers don’t lend any money to anyone, the banks do. Broking networks merely create competition in the sector, competition that would disappear without them and the continued collusion on fees and rates would go on.

The financial planning and advice sector isn’t dissimilar. History has shown that a large percentage of the Australian public are generally unwilling to pay fees out of their own pocket for services that could be considered instrumental to their livelihoods, whether that be a fee to a mortgage broker who can no longer earn commissions, or a fee to a financial advisor for providing quite often very sound financial advice to either build, or more importantly, protect their wealth.

If financial advisors can’t earn up front or trail commissions on insurance products such as life, TPD, critical illness or income protection insurance – and the public are unwilling to pay for the advice to buy these policies – the nett result is a generation of under insured Australians. I’m not sure that this is the outcome anyone is hoping for after 12 months of scrutiny on the industry.

I worked for AMP myself for a little over 12 months (many moons ago now, don’t judge!) and while some of the behaviour uncovered during the Royal Commission probably didn’t surprise me, it also does untold damage to the thousands of people that do the right thing each and every day for their clients. If that 12 month stint taught me anything, it was the importance of having the correct insurance setup. Not long after leaving that job, an acquaintance of mine was diagnosed with a treatable cancer. He was the sole bread winner in the family and was a contractor. He held no income protection insurance, no TPD and only had basic life cover as part of his industry super fund. When I asked him if he insured his car, his answer was ‘yes, of course!’. When I asked him if his ability to earn an income was more valuable than his car, the answer was again ‘yes!’. Obviously the next question was why didn’t he insure his income then….? You could see the light-bulb moment. Yet the very next question from him was how much would it cost to see an advisor, and he seemed hesitant until I told him it was free and they would earn a commission from the insurer. Seems like a pretty good model to me, just make sure the commissions are standardised and a remuneration structure that encourages bad advice won’t exist. It’s the same argument that suggests that if banking executives remuneration wasn’t so heavily linked to shareholder returns, then some of these behaviours in the pursuit of profit may never have occurred. Yet there are no recommendations to change this!

Bad advice and unethical behaviour will always exist, surely the point of the Royal Commission should be to uncover such behaviour and then create an environment where this behaviour is neither encouraged, nor sustainable. None of the recommendations achieve these basic outcomes most people would have hoped for.

For all the bleating, there doesn’t seem to be much attention paid to ‘one stop shop’ setups designed purely to bleed commissions from property sales dressed up as financial advice and wealth building, nor small business getting taken for a ride by punitive conditions enforced in the private lending space.

One positive was the proposed establishment of a comprehensive national scheme for farm debt mediation. Translation: no more ripping off farmers when times are tough. Tick!

Justice Hayne commented:

"Those who oppose change will appeal to real or supposed difficulty in altering present arrangements," Hayne says. "Reference will be made to change bringing 'unintended consequences'. That argument is easily made because it has no content; the 'consequences' feared are not identified.

There are quite clearly identified consequences, and they all seem to favour the banks…. Certainly the biggest and clearly identified unintended consequence of all is that we had a Banking Royal Commission, and after months of hearing about banking misconduct, we have recommendations that benefit those banks – Go Figure!