Final Royal Commission report release: What will it mean for Australians?

The final royal commission report released on the 1 February 2019 has unveiled 76 recommendations made by Justice Hayne, with the Government committing to take action on each of them. 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.

The main problem identified by Commissioner Hayne was that intermediaries involved in loans were based out of the best interests of the lender rather than the consumer. 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.

Recommendations relating to consumer lending include:

Recommendations 1.2. – Best interests duty:

The report recommended the ‘best interests duty’ where the law should be amended to introduce a requirement for mortgage brokers, when acting in relation with home lending to act in the best interests of the borrower. Further, civil penalties should apply to breaches of this duty.

Recommendations 1.3 – Mortgage broker remuneration:

The borrower has the responsibility to pay the mortgage broker a fee for assisting with the home lending process. Lenders should not pay any form of remuneration to mortgage brokers. The changes in brokers’ remuneration should be made over a period of two or three years, 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.

Recommendations 1.5 – Mortgage brokers as financial advisers

After a sufficient period of transition, the laws regulating financial advice to retail clients should apply to mortgage brokers.  

Recommendations relating to Agri lending include:

  • 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 farmland in an area declared to be in drought or subject to other natural disasters.
  • 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 disasters.

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 the external administrator is a remedy of last resort; and
• cease charging default interest when there is no realistic prospect of recovering the amount charged.

Download the Final Report here.

Jacob O’Neill  |  B.Bus  |  Director/Principal

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