The Financial Services Royal Commission recommendations were released on 4th February 2019. There were 76 recommendation in all, covering a wide range of topics. We take a look at the implications for financial advice and mortgage broking in general, and ICT Wealth specifically.
The most surprising thing about the recommendations is what was NOT recommended.
There was nothing at all to restrict financial product companies from owning or controlling financial advice or mortgage broking firms. At the moment, the majority of Australian financial advice firms are owned or controlled by big product companies. Many industry commentators have suggested this structure is the root cause of many of the industry’s problems. It was widely expected the Royal Commission (RC) would ban or restrict this. But it didn’t happen.
Further exacerbating this issue is the use of “independent sounding” names by many aligned advisory firms. The RC did recommend more disclosure to help consumers identify the product companies behind these independent sounding advice firms. But given most consumers get bored or overwhelmed by the significant amount of disclosure already required, it is questionable whether yet another layer of disclosure will make much difference.
There was also nothing to restrict the “inhouse products” increasingly recommended to clients by mid sized financial advice groups. These products include inhouse SMSF administration services and own branded managed funds which generate additional fees.
It appears that in a post RC world, ICT Wealth will continue to be one of the few financial advice firms not owned or controlled by financial product companies, and not promoting inhouse products.
Most of the recommendations that were actually made in relation to financial advice and mortgage broking were for additional compliance measures and changes to payment methods.
For financial advisers, the recommended compliance measures are essentially just a few more layers on top of the many layers of compliance introduced over recent years. Mortgage brokers are not currently subject to the same compliance standards as financial advisers, but the RC has recommended they be treated similarly moving forward. This may involve major operational changes for some mortgage brokers.
ICT Wealth operates as both a financial adviser and mortgage broker. Since our approach is already geared for the higher financial adviser requirements, we don’t anticipate any significant impact in this area.
The RC also made a number of specific recommendations affecting payment methods. At the moment a range of methods are available depending on client circumstances. These include fees, commissions, ongoing direct debits, and the use of superannuation savings to pay for superannuation advice. While this broad range of options can provide greater choice, flexibility and affordability to consumers, it has been misused by some providers. The RC recommended progressively restricting the ways in which financial advisers and mortgage brokers can be paid.
One particularly controversial recommendation is for clients to pay a fee to a mortgage broker if they use their services, rather than the mortgage broker being paid a commission by the lender as happens now. The mortgage broking associations, and most of the non major banks, have argued this will encourage consumers to go to bank branches to get a loan rather than using a broker. It would disproportionately favour the big banks that have large branch networks, and therefore reduce competition in the mortgage market and drive up interest rates. This is the only recommendation out of the 76 which the government has indicated they intend to delay and review rather than implement as recommended.
From an ICT Wealth perspective we may need to adapt our business according to whatever payment method restrictions are ultimately introduced. We will let all existing clients know well in advance if it requires any change to their current arrangements.
Implementation of most RC recommendations will require new or amended laws. This means they will have to go through the parliamentary process. With the Budget coming up, followed by an election, it may be some time before any changes can get processed by parliament. It is also possible that once the media hysteria dies down and the election is over, the government at the time may undertake more rigorous assessment of the Royal Commission impact on consumers, and vary the program of implementation accordingly.