The unethical practice of charging “fees for no service” will come to an end, mortgage brokers may lose the incentives that make many of them work for the banks rather than their clients, people making dodgy car loans and selling worthless funeral insurance will be pushed towards the exit, and a last-resort compensation scheme will be offered to victims of unscrupulous banks.
These are just some of the major changes consumers can expect following the year-long banking royal commission and commissioner Kenneth Hayne’s final report, all of whose 76 recommendations will be taken up by the Federal Government â€” at least in part.
Fees deducted from people’s accounts, including their super funds, were often massive, and no-one could forget the revelations that dead people were slugged, including, unbelievably, for life insurance.
“Until satisfactory steps have been taken to deal with those involved in the charging of ‘fees for no service’, and to ensure that it does not happen again, the financial advice industry will lack the public respect and trust that is a necessary aspect of any profession,” Mr Hayne said in his final report to the Federal Government.
The total amount to be paid as compensation by AMP and the big four banks was initially estimated to be about $180 million, but will easily exceed $1 billion, and it could take years until people are paid back.
The Morrison Government will establish a compensation scheme of last resort. This scheme will be paid for by industry.
The Government said the cost of compensating individuals â€” who had a prior unpaid determination made in their favour by predecessor bodies of the Australian Financial Complaints Authority (AFCA) â€” will see almost $30 million paid to about 300 consumers.
Bye bye grandfathered commissions
The report also called for an end to mortgage brokers’ conflicted remuneration, starting with banning trailing commissions. It suggests a ‘best interests’ duty for mortgage brokers, treating them like other financial advisers.
“As the Aussie Home Loans broker misconduct case study showed, brokers are astute to do nothing that will interfere with the continued flow of trail commissions,” Mr Hayne noted. “Why would they?”
Commissions that continue to be paid to intermediaries who sold financial products prior to the Future of Financial Advice (FoFA) reforms â€” that would otherwise be classified as conflicted remuneration â€” are known as grandfathered commissions.
“Advisers have an incentive to keep their clients in products with grandfathered commissions rather than advise them to move to better products,” Mr Hayne noted. “There can be, and is, no justification for maintaining the grandfathering provisions.”
“It is time to ignore the ghostly apparition of constitutional challenge conjured forth by those who, for their own financial advantage, oppose change that will free advice about, or recommendation of, financial products from the influence of the adviser’s personal financial advantage.”
The Federal Government in its response, has agreed to end grandfathering of conflicted remuneration from January 1, 2021.
Mr Hayne’s report also called on ASIC to consider further reducing the cap on commissions in respect of life risk insurance products.
It said, unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.
Car dealers under fire
Car dealers would no longer be exempt from national consumer credit protection laws, facing a cap on commissions for add-on insurance sales.
Mr Hayne’s report said consumers making large purchases, such as motor vehicles, whitegoods, or furniture, at times “borrow money in order to pay the price”.
The report notes that the person with whom the consumer deals at the point of sale is not subject to the National Consumer Credit Protection (NCCP) Act, and that car dealers act as agents for lenders without holding a financial services licence.
Mr Hayne’s report singled out “flex commissions” â€” an arrangement between lenders and car dealers, which allows the dealer to set the customer’s interest rate on a loan-by-loan basis. It often leads to customers being hit with very high interest rates.
Flex commissions have been banned since November, but their impact was laid bare during the royal commission hearings.
It heard Westpac was continuing to offer flex commission arrangements to car dealers when the commission looked at the issue.
“There will be many car loan contracts on foot where the interest rate being charged will be above whatever rate the lender fixed at the time as its base rate,” the report observed.
Funeral insurers no longer get exempted
The exclusion of some forms of funeral insurance from the definition of ‘financial product’ will be brought to an end.
The commission took evidence about two types of funeral insurance: funeral life policies and funeral expenses policies.
Evidence given in the commission’s fourth round of hearings indicated Aboriginal and Torres Strait Islander people, especially those living regionally or remotely, may have been particularly likely to be sold funeral insurance policies in circumstances where those policies held little value for them.
“The exclusion of funeral expenses policies from the definition of ‘financial product’ cannot be justified,” Mr Hayne said in his report.
“All forms of funeral insurance should be subject to the same regulatory regime and supervision. This is particularly important given the concerns that I hold about the value of these types of products.”
Unfair contract terms provisions extended
Mr Hayne wants the unfair contract terms provisions now set out in the ASIC Act to apply to insurance contracts.
In 2010, unfair contract terms laws were introduced in a bid to better protect consumers.
But the regime contained in the ASIC Act applies to contracts for financial products and financial services.
The provisions do not apply to insurance contracts regulated by the Insurance Contracts Act.
“They should,” Mr Hayne said.
In late 2017, the Government announced it would extend the regime to cover insurance contracts, and in June 2018, Treasury published a proposals paper outlining its planned model.
Sanctions for breaches of industry codes
As Mr Hayne noted: “If industry codes are to be more than public relations puffs, the promises made must be made seriously.”
They must also, he said, be kept.
“This must entail that the promises can be enforced by those to whom the promises are made: the customer who acquires the product or service, and the guarantors of loans to individuals and small businesses,” he said.
Mr Hayne recommended the law should be amended so ASIC’s power to approve codes of conduct extended to codes relating to all APRA-regulated institutions and ACL holders.
It also suggested new banking code provisions that would benefit low-income and vulnerable groups, including banning unarranged overdrafts and default charges on basic bank accounts.
Funding community legal centres and financial counsellors
The Federal Government has also committed to review the adequacy of funding for community legal centres and financial counselling.
Mr Hayne highlighted the important role such organisations play.
“Community legal centres and financial counsellors frequently struggle with demand,” Consumer Action Law Centre’s chief executive Gerard Brody said.
“It is time to adopt an industry levy to fund these important services that ensure disadvantaged people have ‘equality of arms’ when they have a dispute with a financial institution.”
He was disappointed there were not further restrictions on responsible lending.
“If there were better remedies for consumers subject to irresponsible lending â€” including debt waiver â€” this would provide an important compliance incentive”, he said.