BY THE NUMBERS | Our response to the Banking Royal Commission final report

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Late yesterday afternoon, the Government released Hayne’s final report of the Royal Commission into misconduct in the banking, superannuation and financial services industries.

AT A GLANCE

The Government’s response will include action on all of the 76 recommendations.

Treasurer Josh Frydenberg added that the Government will be delving further into some critical areas – including the establishment of a compensation scheme of last resort (CSLR) – which will be funded by industry.

In addition, the Treasurer also noted the Government’s “principal focus is on restoring trust in our financial system and delivering better consumer outcomes, while maintaining the flow of credit and continuing to promote competition. These objectives are vitally important to the health of the economy and therefore to the health of our community.”

IN DEPTH

We’d like to share with you some of our expert insights and responses to the report:

Phil Ringuet, Director, Lending Solutions

The Royal Commission has taken a deep dive into how lenders have previously lent money – and this goes deeper than just your home loan.  The review has been extended to take into account car loans, credit cards, personal loans and even the way banks conduct themselves within the SME market.

The expectation of Mr Hayne was to uncover whether in fact the banks had conducted themselves within the communities expectations and perhaps paused to ask themselves even though we could have, should we have?

The availability of credit has been squeezed prematurely via a pre-emptive strike from the banks and predicted changes to the lending environment are now unlikely to surprise.  Here are some of the key items which will effect borrowers now and into the future:

  • Living expenses – banks have moved away from accepting minimum living expenses benchmarks set by your income, relationship status and even your postcode. Living expenses now face a high level of black and white scrutiny based on your last 3 to 6 months spending patterns.
  • Benchmark or buffered rates – This refers to the actual rate the banks assess your current lending facilities at. Banks regularly asses your home lending at 7.25% to 8.5%, Credit cards at 37% to 46% of your limit, business lending at 8.25% and above. We expect credit card servicing to become harder still as regulators have requested that onto of the % cost applied you should be able to demonstrate paying out card limits in full every 3 years.
  • Household debt to income ratios – Debt to income ratios are now also being largely considered by the banks. This means that applications are reviewed to ensure that their total household debt including proposed lending are no more than 4.5x to 5.5x. In some cases application which may services are automatically declined in the event they exceed these stipulated ratio’s.
  • Repayment types – Interest only lending caps have been lifted for the lender in a move which is aimed at kick-starting investor credit growth. Whilst the removal of a hard cap will allow borrowers to access this repayment type don’t expect it unless your reasoning and or strategy is sound. Banks will be very unlikely to offer interest only rates to owner occupier and to investors who are looking to borrow above an 80% Loan to Value Ratio (LVR). We would also find it unlikely banks will look extend interest only terms without further without strong mitigates to support the move.
  • Loan terms – When assessing applications banks are increasingly looking to match terms of loans to ensure that they are paid out prior to retirement. An example of this is a 57 year old who intends to retire at 67 will only receive a 10 year loan term. This will have a large impact on servicing as you will be able to demonstrate that you can repay this liability with your buffered rates and your said living expenses principal and all within the 10 year time frame. Whilst exit strategies can be employed the banks will look to ensure that upon your said retirement age you will own your property you live in and or be able to service your proposed liabilities with other income streams post your retirement.
  • Best interest duty – Previously lenders and mortgage brokers alike have worked under the guise (not unsuitable) duty which can be best described as ensuring any recommendation does not place an applicant in hardship.  Best interest duty may align brokers with financial advisors with the view to broadening the scope of their recommendation to ensure that all products and services have been reviewed along with deep consideration of a client’s financial circumstances which will ultimately result in the best product and service being delivered.  The outcome for the client may be a more invasive initial interview process, protracted application times and additional documentation required to support the delivery of an outcome.

Brett Griffiths, Director, Superannuation Advisory

At long last, the final Royal Commission report has been released.

In the preamble, Commissioner Kenneth Hayne mused on how instances of misconduct revealed during the hearings were driven “not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business.”

This, he said, led a situation where “providing a service to customers was relegated to second place. Sales became all important.”

“Those who dealt with customers became sellers,” he added. “And the confusion of roles extended well beyond front line service staff. Advisors became sellers and sellers became advisors.”

Generally, Commissioner Hayne has based his recommendations on six general underlying principles:

  • obey the law;
  • do not mislead or deceive;
  • act fairly;
  • provide services that are fit for purpose;
  • deliver services with reasonable care and skill; and
  • when acting for another, act in the best interests of that other

So, for consumers, they should not actually see much impact from their day to day dealings.

Paul Green, Director, Vincents Financial Advisory

The challenges in the financial advisory industry have been evident since the Global Financial Crisis, and ASIC have actually taken steps to try and improve regulation and education since that date.   What we are now witnessing is the Royal Commissioner Ken Hayne working to fine-tune these steps that have already been taken to date – and with a lot of material to work with (to the industry’s enormous discredit).

Of these challenges, perhaps the greatest is that it’s nearly impossible to regulate putting your clients interests first… and people still need to be very cautious when choosing a financial advisor – even in the post Hayne regime.

Save a recommendation to reduce commissions, there hasn’t been a lot of structural change recommended in the Haynes report – so it is important to note that banks can still own financial advisory and insurance businesses.

In establishing our financial planning practice at Vincents, it was paramount to our partners that the basis for our advice aligned with our firm wide ethics of acting with integrity, with due care and in the client’s best interests.

When it comes to financial services – ensure that you are working with a financial advisor (whether that be at Vincents or elsewhere) that holds themselves true to professional standards, a code of conduct, defined educational standards and the commitment to a fiduciary type duty that all professions should have.

LOOKING FORWARD

At Vincents we are committed to bringing you more of our insights and observations as we track the execution of these recommendations by the Government, the reaction of the financial services industry and the impact this will have on all Australians as we face the future.

Want to know more?

Should you have any questions in relation to the Banking Royal Commission’s final report, please contact Phil Ringuet, Lending Solutions Director, for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

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