The Government released the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry on 4 February 2019.
A total of 76 recommendations were made, with the Government committing to take action on all of them.
Commissioner Hayne observed that the aim of the Royal Commission was to inquire as to whether the conduct of financial services entities was either illegal or fell below community expectations. Identifying wide spread problems, the Royal Commission concluded that the main reason for the misconduct was both corporate and individual greed. Financial services entities sought higher profits and individual employees were rewarded for sales to customers with the result that the best interests of the customer were often not considered until last.
Additional problems identified were firstly that intermediaries involved in loan applications often operated in their own best interest or in the best interests of the lender rather than the consumer because they were paid by lenders and paid only if a loan was taken out and on the size of the loan. Secondly, financial services entities breaching the law were not sufficiently held to account.
The recommendations contained in the report seek to answer the following questions:
- Can the law be simplified to achieve its intentions?
- How can the approach to the conflict of interest between the duty to customers and self-interest be improved?
- How can the role of the regulators be improved?
- What can be done to improve the behavior of financial services entities so that they comply with basic norms of behavior underpinning the financial services industry?
17 recommendations relating to consumer credit were made as follows:
- Responsible lending: The responsible lending provisions contained in the National Consumer Credit Protection Act 2009 (NCCP Act) should not be amended, with the Commission stating that the current obligations relating to assessing unsuitability should remain in force.
- 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.
- Mortgage brokers as financial advisers: Laws regulating financial advice to retail clients should be extended to apply to mortgage brokers.
- 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:
- 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.
- A two year limit will apply to the clawing back of commissions from mortgage brokers and the passing on of the cost of the clawback to consumers will be prohibited.
- 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.
- From 1 July 2020:
- 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.
- Misconduct by mortgage brokers: Information sharing and reporting obligations for Australian Credit Licence (ACL) 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 ACL holders to make all reasonably necessary inquiries to identify the misconduct and to inform and remediate 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.
- Removal of point-of-sale exemption: Retailers should no longer be exempt from the provisions of the NCCP Act 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.
- 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 dishonor fees on basic accounts.
- No extension of the NCCP Act to small business: The NCCP Act should not be amended to apply to loans to small business. The Government agrees with this recommendation.
- 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.
- Farm debt mediation: A national farm debt remediation scheme should be introduced.The Government has agreed with this recommendation.
- Valuations of land: APRA should amend Prudential Standard APS 220 to require independent valuations.
- 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.
- 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.
- Enforceable code provisions: The law should be amended to provide ASIC with power to approve codes of conduct relating to banking institutions and ACL holders. These codes may include enforceability 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 enforceability 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.
- 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.
- 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 remediates customers as appropriate.The Government has agreed to this recommendation.
- CCH Parliament’s summary report on the Royal Commission’s final report, 4 February 2019
- Responsible lending checklist and roadmap in CCH’s Australian Consumer Credit Law Reporter.
This article was first published in CCH’s Australian Commercial Law Tracker on Tuesday 5 February 2019.