The Government released the final report of the Royal Commission on Monday 4 February 2019. This report details into the Misconduct of the Banking, Superannuation and Financial Services Industry. A total of 76 recommendations were made.
The purpose of this Royal Commission Report was to question as to whether the conduct of financial services entities were legal or whether or not they fell below community expectations. Through identifying the wide spread problems, the Royal Commission concluded that the main reason for misconduct and illegal activity within these industries was due to corporate and individual greed. Financial services entities wanted higher profits and individual employees were getting rewarded for sales to customers with the result that the best interests of the customer were often not considered.
Some additional problems that were also identified include intermediaries who were involved in loan applications often operated on their own accord or best interest of either themselves or of the lender rather than the consumer because they were paid by lenders and were paid only if a loan was taken out. The pay also varied based according to the size of the loan.
The recommendations contained in the report seek to answer the following questions:
Of the 76 recommendations, 17 relating to consumer credit were made as follows:
- 1. Responsible lending
The responsible lending provisions contained in the National Consumer Credit Protection Act 2009 need not to be amended, with the Commission stating that the current obligations relating to assessing unsuitability should remain in as is.
- 2. Best interests duty — mortgage brokers
The law should be amended to introduce a requirement for mortgage brokers, when acting in a home lending capacity, to act in the best interests of borrowers. Civil penalties should apply to breaches of this duty.
- 3. Mortgage brokers as financial advisers
Laws regulating financial advice to retail clients should be extended to apply to mortgage brokers.
- 4. Mortgage broker remuneration
Borrowers should pay mortgage brokers a fee for assisting with the home lending process. Lenders should not pay any form of remuneration to mortgage brokers. These changes should be phased in over a two to three year period, firstly by prohibiting lenders from paying trail commissions to mortgage brokers for new loans and then prohibiting lenders from paying any other commissions to mortgage brokers.
The Government response to this recommendation:
- (a) From 1 July 2020:
- • the payment of trail commissions from lenders to mortgage brokers for new loans will be prohibited;
- • commissions paid to mortgage brokers by lenders will be calculated according to the amount drawn down on the loan rather than the total amount of the loan; and
- • campaign and volume based commissions and payments will be banned.
- (b) A two year limit will apply to the clawing back of commissions from mortgage brokers and the passing on of the cost of the claw back to consumers will be prohibited.
- (c) In three years’ time the Council of Financial Regulators and the ACCC will review the success of the new system of mortgage broker remuneration. The review will focus on the impact of the changes on consumer outcomes and competition.
- (a) From 1 July 2020:
- 5. Establishment of working group
A Treasury-led working group should be formed to monitor the changes to the mortgage broker remuneration structure. The working group should be able to make changes as required. The Government has responded to this by foreshadowing the review of the new scheme outlined in 4 (c) above.
- 6. Misconduct by mortgage brokers
Information sharing and reporting obligations for Australian Credit Licence holders should be extended to apply to misconduct by mortgage brokers. When misconduct is detected remediation measures should be put in place.
The Government has responded to this recommendation by stating that information sharing and reporting obligations should be extended to cover misconduct by mortgage brokers. This includes requirements for Australian Credit Licence holders to make all reasonably necessary inquiries to identify the misconduct and to inform and re-mediate affected borrowers promptly. Mortgage brokers who have been found to have engaged in misconduct must be appropriately disciplined and prevented from avoiding detection by moving from one licensee to another.
- 7. Removal of point-of-sale exemption
Retailers should no longer be exempt from the provisions of the National Consumer Credit Protection Act 2009 as this exemption has caused many consumers to suffer hardship. This would mean that third party vendors and lenders would be required to only recommend credit that is not unsuitable for the consumer.
The Government agrees to the removal of the point-of-sale exemption and plans to introduce this change in consultation with affected businesses.
- 8. Amending the Banking Code
The Australian Banking Association should amend the Banking Code to require banks to provide more assistance to Indigenous Australians. Banks should not allow informal overdrafts on basic accounts without prior agreement and not charge dishonour fees on basic accounts.
- 9. No extension of the National Consumer Credit Protection Act 2009 to small business
The National Consumer Credit Protection Act 2009 should not be amended to apply to loans to small business. The Government agrees with this recommendation.
- 10. Definition of ‘small business’
The Banking Code should be amended to apply to businesses with less than 100 full time equivalent employees where the credit applied for is less than $5 million.
- 11. Farm debt mediation
A national farm debt remediation scheme should be introduced.
The Government has agreed with this recommendation.
- 12. Valuations of land
APRA should amend Prudential Standard APES 220 to require independent valuations.
- 13. Charging default interest
The Banking Code should be amended to prevent the charging of default interest on agricultural land loans in a drought affected area while a declaration is in force.
- 14. Distressed agricultural loans
When dealing with distressed agricultural loans banks should offer debt remediation with the goal of working through problems rather than foreclosure. The appointment of external administrators should be a last resort measure and default interest should not be applied in circumstances where there is no prospect of recovering the amounts charged.
- 15. Enforceable code provisions
The law should be amended to provide ASIC with power to approve codes of conduct relating to banking institutions and Australian Credit Licence holders. These codes may include enforce-ability provisions permitting contraventions to be seen as breaches of the law and ASIC could take the inclusion of such provisions into account in its decision to approve a code. Breaches of the enforce-ability provisions could be similar to those set out in Pt VI of the Competition and Consumer Act. Mandatory financial services industry codes should be established.
The Government has agreed to the recommendations stopping short of agreeing to the mandatory code recommendation.
- 16. 2019 Banking Code of Practice
The new Banking Code should make terms in contracts with customers or guarantors enforceable code provisions.
The Government supports this recommendation.
- 17. Banking Executive Accounting Regime (BEAR) product responsibility
APRA should ensure that each ADI subject to BEAR is accountable for the products it offers to customers and re-mediates customers as appropriate.
The Government has agreed to this recommendation.