How does the royal commission affect older Australians and retirees?
The royal commission report delivered yesterday contained 76 recommendations aimed at cleaning up a stained sector in need of cleansing, but did it go far enough to address the white-collar crimes inflicted upon thousands of victims?
The answer is no, or maybe, or wait and see.
While Kenneth Hayne’s report points out the underlying long-term greed inherent in the banking and financial system, there are concerns it does little in the way of making a difference in the short term.
Sure, the 76 recommendations, most of which may be implemented if you believe Treasurer Josh Frydenberg, may do some good, but with a federal election looming and just 10 sitting days, we may not see any changes for at least 12 months.
There’s a prevailing sentiment that the big banks will make out like bandits – again – escaping direct criminal prosecution which has been palmed off on to the organisations that allowed this misbehaviour to occur in the first place. They’ll also be the beneficiaries of potential savings should trailing commissions for brokers be banned, and may even have their smudged records wiped clean, allowing them to start over instead of paying the price for their misdeeds.
So, who else wins from this report? How does the royal commission affect older Australians and retirees? How long will you have to wait before you see any benefit from the royal commission? Will this report have a positive impact on your hip pocket? We’ve asked three industry experts for their opinion.
Matt Grudnoff is a senior economist at The Australia Institute, has previously worked for the Australian Bureau of Statistics and the Department of Climate Change and Energy Efficiency, and works with YourLifeChoices on the quarterly Retirement Affordability Index™.
We need to be very careful about giving the banking system a free pass for bad behaviour because we’re worried that enforcing the law will upset the banking sector and that will in turn throttle the flow of credit. The royal commission has shown us that you can’t buy stability by turning a blind eye. We need a rules-based system which everyone in the banking sector has to abide by. That is how you maintain long term stability.
The problem at the very heart of the financial sector is the market power of the big four banks. They have grown too large and too powerful. The big four banks in Australia are all in the top eight most profitable banks in the world. Their behaviour is simply a response to this power. Economics 101 says that lazy oligopolies will take advantage of customers in order to maximise profits. If we really want to reform the banking sector to ensure that what the royal commission has uncovered will never happen again, then we need to reduce the market power of the banks. The only realistic way to do this is by reducing their size. We need to break up the big four into a larger number of smaller banks. This will create real competition in the sector.
Graham Hand is the managing editor of the leading financial newsletter, Cuffelinks. Graham writes regularly on investing for YourLifeChoices.
The royal commission’s work will lead to few immediate changes for retirees, despite the final report acceptance in full by both major political parties. It’s not recommending changes to tax rates, social security payments or eligibilities that would hit the hip pocket quickly.
Change will be more gradual. Commissioner Kenneth Hayne believes banks have put profit before customers, and he appeals to their ‘culture’ to address priorities. This relies on action from boards and senior management in the day-to-day decisions affecting customers and is where doubt arises.
For example, when the bank pricing committee sits down to decide whether to make a rate increase on mortgages, will it put the customer before profit and shareholders in the competition between stakeholders? It’s unlikely much will change there.
Hayne prescribes little about executive remuneration, and while the shareholder backlash should create some salary moderation, don’t expect any zeros to be knocked off the handsome packages.
Over the coming year, however, there is no doubt the regulators will feel empowered to take firmer action against misconduct, and retirees who feel they have been mistreated by a financial institution will have better forums for redress. It’s likely that banks themselves will solve problems quicker and not want the glare of publicity which has caused so much pain during the commission.
The ways retirees access loans from mortgage brokers or obtain financial advice will also change, although with implementation dates pushed into 2020 and 2021. Hayne wants payments to mortgage brokers to come from borrowers, not banks, while investors should pay for advice rather than the product provider offering the adviser a commission. Many retirees probably prefer to avoid these direct costs.
Erin Turner – CHOICE Director of Campaigns and Communications
This report is good news for retirees and all others seeking financial advice. It seeks to clean up loopholes in the law so that consumers can expect financial advisors can be trusted with their money.
There has been a lot of reform suggested for the financial advice sector in recent years, but an awful lot of ‘carve-outs’ heavily lobbied for by the industry.
Consumers should be able to trust that their advisors are just working in their best interests.
Will this now actually happen?
Hopefully. There are clear and strong recommendations about financial advice. Until now many such reforms have been watered down. But this report contains recommendations that could be quickly and effectively implement, for instance the grandfathering of commissions in the financial advice sector, including life insurance products. Many retirees will actually still be paying these commissions. A new body with oversight for all financial planners may take longer. But it’s worth noting that Commissioner Hayne has allowed three years for the roll-out of many of his suggestions, with a further recommendation of an independent review of financial advice in three years’ time.
How will the royal commission report recommendations affect you? Do you expect any benefit from the commission’s findings?