04 Feb Final royal commission report released
The final report contains 76 recommendations. The following
are some of the key recommendations made by Justice Hayne.
Several recommendations deal with conflicts of interest or conflicts between duty and interest and that the law should be amended to provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower.
Some of the mortgage broking industry’s worst fears are contained in the final report with the commission recommending the industry move from a commission-based to fee-based model.
Commissioner Hayne says home loan customers should foot the
bill for the fee not the banks. At the moment, brokers receive upfront and
trailing commissions from banks and other lenders, meaning the broker is
incentivised to secure the customer a loan — and the size of the commission on
offer can influence the broker’s selection of the lender and the size and type
of the loans.
Commissioner Hayne recommends a “steady but deliberate” move from the existing model to a model where a borrower pays a fee instead. The Government says it will ban trail commissions and other “inappropriate forms of lender-paid commissions” on new loans from July 2020, and will conduct a review in three years to consider the implications of removing upfront commissions and moving to the borrower-pays model.
The report also recommends clearing up the question of who the mortgage broker is acting on behalf of. While brokers currently receive commissions from banks and other lenders, the commission heard evidence that the reality is, customers believe the broker is looking out for their best interests. Commissioner Hayne recommends enshrining this in law through a “best interest duty” — breaching this obligation could lead to the broker being hit with a civil penalty.
Recommendation 1.2 – Best interests duty
The law should be amended to provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower. The obligation should be a civil penalty provision.
Recommendation 1.3 – Mortgage broker remuneration
The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.
Recommendation 1.5 – Mortgage brokers as financial advisers
After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
Establish a national scheme to mediate farm debts.
Banks would be barred from charging dishonour fees on basic accounts.
Amend the banking code of conduct so people in remote areas or those with poor English skills can access and undertake banking.
Require banks not to charge default interest on loans secured by farm land in an area declared to be in drought or subject to other natural disaster.
Have banks ensure managers of distressed farm loans are
experienced agricultural bankers. Recognise that appointment of receivers on a
farm loan is a “remedy of last resort”.
Recommendation 1.13 – Charging default interest
The ABA should amend the Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster.
Recommendation 1.14 – Distressed agricultural loans
When dealing with distressed agricultural loans, banks should:
• ensure that those loans are managed by experienced agricultural bankers;
• offer farm debt mediation as soon as a loan is classified as distressed;
• manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst;
• recognise that appointment of receivers or any other form of
external administrator is a remedy of last resort; and
• cease charging default interest when there is no realistic prospect of recovering the amount charged.