Harbour's View: What the Australian Royal Commission means for the industry

After a year long review the Hayne Royal Commission (RC) into Misconduct in Financial Services has laid out recommendations. This reshaping of the financial services industry has significant implications and received strong political support, ahead of a likely election by 18 May 2019. It is possible that the Labor Party may have a harsher interpretation of potential changes than the RC recommends.

The final RC has been widely anticipated and the development of Hayne’s views have been consistently in the public domain from day one. Perhaps the continued surprise has been the focus on wealth management more than actual banking practices. As a result, the final report’s recommendations are relatively hard-hitting on wealth management firms that lack independence where material industry change seems highly likely. The regulatory structure also gets a significant overhaul with a new super oversight authority. Banks seem to get little in the way of fresh issues to deal with at this stage.

Vertical integration maintained (just)

The report recommends structural change to address issues of greed, skewed incentives and a lack of consumer focus. But in contrast to expectations, the report recommended against the removal of vertically integrated business models. Instead a tighter set of rules around vertical integration in the wealth management and financial advice sector will make it tougher to inappropriately incentivise and sell financial products through purely aligned channels. Banks are addressing how they might divest wealth management and mortgage broker businesses. The report says that changes in remuneration practices should be made over two to three years. The RC says that lenders will be prohibited from paying trail commissions to mortgage brokers and that mortgage brokers should be subject to financial product advice laws.

Wealth managers face tougher issues to ensure advisers place clients first. Specifically, advisers must, when “providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased.”