What if...: Annette Sampson

Revelations of illegal and unethical practices have underscored the need for financial reform

DON’T LOOK NOW, BUT ...

The changes are already happening. Commonwealth Bank made news in June when it announced it would spin off its financial advice and mortgage broking businesses into a separate company. NAB said it would sell its wealth arm, MLC, earlier in the year and ANZ sold its OnePath wealth management business to IOOF late last year. After rushing to get into the wealth management business more than a decade ago, banks are now questioning whether ownership of distribution channels such as financial planners and brokers is worth it.

BAD BEHAVIOUR

Increasing regulation isn’t new. For financial advice, in particular, the government has been tightening the rules for years. But the royal commission has put the spotlight on just how conflicted banks are by owning advice or, as they refer to them, “distribution” channels and how consumers lose out. This has led to calls for reforms ranging from tougher rules to forcing the banks to get rid of these arms completely.

In financial planning, the royal commission uncovered everything from conflicts of interest to bad advice and blatant revenue raising, even to the extent of charging dead customers for ongoing advice. Fraud, misrepresentation, not making sure customers could afford their loans and incentives to push borrowers into bigger, longer-term loans to maximise commissions were some of the dubious practices attributed to mortgage brokers.

In both cases, the banks’ vertical integration business model (where it owns the businesses that sell its wealth and loan products) were clearly shown to be part of the problem leading to inevitable conflicts of interest.

This follows an Australian Securities and Investments Commission report in January, which found the big four banks and AMP were heavily biased to selling their own products. Despite in-house products making up only 21% of the products on their approved lists, 68% of clients’ funds were invested in-house. Perhaps even more worryingly, 75% of customer files the regulator reviewed did not comply with the planner’s duty to act in the customer’s best interest.

Last year an ASIC report into how mortgage brokers are paid found brokers are incentivised through the existing commission system to recommend larger

loans, and while they may have a panel of lenders much of their business usually goes to a small number of lenders.

FINANCIAL PLANNERS

Calls for banks to split their wealth arms from their banking businesses were led by Professor Allan Fels, the former consumer regulation chief. Regardless of what the royal commission finds, this is already under way. There are also anecdotal reports of advisers leaving bank-controlled planners to start their own businesses.

Other possible crackdowns include a full ban on commissions (while commissions were banned in the financial advice reforms a few years ago, grandfathering arrangements allowed some to continue), tougher penalties and measures to force ASIC to wield a bigger stick in dealing with bad behaviour and conflicts of interest.

It all points to a major industry shake-up, which would see many planners leaving the industry alongside growth in smaller, independent planning groups. Critics claim this would be bad for consumers as they would not be able to afford advice, though with only one in five consumers currently using a financial planner it is also arguable that more consumers might feel confident to seek advice if conflicts of interest were removed.

MORTGAGE BROKERS

How brokers are paid will inevitably change as a result of the royal commission. Unlike financial planners, commissions have not (yet) been banned for mortgage brokers. Typically, consumers pay nothing for a broker’s assistance in getting a loan but the lender pays an upfront commission of around 0.6% of the loan value and an ongoing trail commission of around 0.18%. In its review last year, ASIC also found that arrangements such as soft dollar commissions such as loyalty programs and travel were common.

ASIC proposed changing commissions so they are no longer based on the size of the loan, a recommendation picked up by the banking industry’s own review. The Combined Industry Forum, comprising banks, brokers and consumer groups, has also been looking at ways of making mortgage broking more transparent and accountable. Any new commission model (and at this stage, most accept commissions will remain for brokers) is likely to be more focused on customer outcomes, though just how this would work remains to be seen.

Annette Sampson has written extensively on personal finance. She was personal finance editor with The Sydney Morning Herald, a former editor of the Herald’s Money section and a columnist for The Age. She has written several books.