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After the trust is gone

Kieran O'Dwyer and David Considine

It will not be surprising if many consumers are feeling overwhelmed and mistrustful of the financial services industry in the aftermath of the Royal Commission. The proceedings highlighted the very worst practices of some of the big institutional banks as well as the established financial brands popular with mum and dad investors.

At Moore Stephens, we’re left optimistic by the 76 recommendations of Commissioner Hayne’s final report. Why? The report endorsed what we’ve always believed – compliance is critical to putting our clients' needs first.

We’ve been proactive in ensuring we’ve kept ahead of the compliance and licencing requirements of our industry. To that end, our core business will not require significant change should most, or all, of the recommendations, be implemented post the Federal election. 

Beneficial financial outcomes for our valued clients has always been at the forefront of Moore Stephens Wealth Management’s Victoria investment philosophy and advice process. “We see our relationship as one of absolute trust” that often encompasses intergenerational relationships and transfer of wealth. Moore Stephens Wealth Management Victoria is committed to distinguishing from our industry piers and large institutions with client service excellence and best of breed advice practises encompassing wealth management, superannuation, strategic advisory and wealth protection. 

Brokering a solution

Anyone who has been watching the fall-out from the report’s release would know that the mortgage broking industry could be in for a shake-up. The report singled out the industry, suggesting that some brokers were not acting in the best interests of their clients to ensure they receive a ‘trailing’ commission from the lenders. Commissioner Haynes went so far as to say they were “money for nothing”.

Typically, a broker will receive an upfront commission from a bank ranging from 0.5% to 0.65% of the loan amount. They are then paid a trailing commission from a bank which can range from 0.1 to 0.25% per year of the ongoing loan. As a larger loan takes longer to pay-off, the broker receives a bigger commission. It’s estimated that $1 billion worth of trailing commissions is generated annually in Australia. 

As a result of the commission’s findings, mortgage brokers may be forced to charge their clients fees at the start of their engagement, a cost we doubt many would-be borrowers cannot afford. Should this recommendation be adopted, it could also push mortgage lending process back into the hands of the banks to complete the applications as well as control the responsibility of signing off loan applications which they currently do. Indeed, a broker can lose their licence if they misrepresent their client’s borrowing capacity. 

A recommendation that will ultimately once again centralise lending with the large banks does seem at odds with the intent of the Royal Commission, especially when the banks were on the receiving end of its most fervent criticism. In response, Labor has proposed a compromise on trailing commissions, which will see borrowers paying a flat upfront fee rather than a percentage of the loan. The Coalition is concerned that forcing upfront fee payments would destroy competition but has still agreed to banning trailing commissions for new loans from July 2020.

Our home loan division may too face potential revenue loss if this recommendation is adopted, but we’re confident this can be successfully navigated given our division has a broad scope including a broad range of lending as well as debt advisory and consultancy work. The outcome of the commission has already had an immediate effect on client uptake by those who are mistrustful of the large banking institutions and want expert advice to help deal with them. 

Anyone who has tried to take out a loan recently will understand how challenging lending has become. Some potential borrowers are even seeing their Instagram photos scrutinised to ensure their lifestyle holds-up against the Household Expenditure Measure as well as combing through every line of three months’ worth of bank statements. These conditions will eventually have to ease, as it’s already causing a ripple effect throughout the economy, as the recent slump in house prices in Melbourne and Sydney can attest. 

Where to from here?

They say that trust takes years to build and just minutes to destroy. On this basis, the country’s big financial institutions have a significant task in earning back the confidence of the public. Only time we tell if it will result in meaningful change for the better, but hopefully, the Royal Commission has highlighted the critical issue of taking responsibility for your financial literacy.

While areas such as superannuation and wealth management can be complex landscapes to navigate, greater financial education would at least safeguard many households against taking out loans they can ill afford or serving as guarantor for dodgy investments.

We see it as central to our job as wealth asset advisors to ensure our clients are informed and our approach emphasises service, not sales. It means that at Moore Stephens you walk out of a meeting better informed than when you walked in. We’ve done our job well if, over time, our clients can lead the conversations about their current financial position and future aspirations while being confident in the knowledge their best interests are being looked after.