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The senior counsel assisting the royal commission has suggested that the commission is looking to potentially recommend* a ban on trail commissions.
Speaking during the fourth day of the seventh round of hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the senior counsel assisting, Michael Hodge, outlined that Westpac (whose CEO was giving evidence) “opposes many of the potential reforms that are raised in the interim report”.
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What the report says
In the royal commission’s interim report, the commission said that there was “no reason to doubt” the findings of ASIC’s review of mortgage broker remuneration, nor was there any reason “to doubt that value-based upfront and trail commissions to third parties contribute to those outcomes”.
It later added: “What is plain, however, is that value and volume-based remuneration for intermediaries in the home loan industry has been an important contributor to misconduct and conduct falling short of community standards and expectations and poor customer outcomes.”
It continued: “The assertions by Aussie Home Loans and Smartline Home Loans Pty Ltd that the present remuneration structures for intermediaries are not shown to lead to any consequence that calls for alteration of the system are not to be accepted.”
The interim report therefore said: “[It] will be important to consider whether value and volume-based remuneration of intermediaries should be forbidden.”
While the royal commission did not outwardly suggest that trail commissions should be banned for brokers in its interim report, nor was trail commission the subject of any of the questions the public was asked to specifically respond to, the inference in Mr Hodge’s questioning was that the commission was considering recommending a ban on trail.
He said: “It appears that Westpac opposes many of the potential reforms that are raised in the interim report?”
When asked to be specific, Mr Hodge reeled off a range of “potential reforms” that he said Westpac opposes (and to which CEO Brian Hartzer agreed).
Mr Hodge said: “It [Westpac] opposes preventing authorised representatives from recommending a product manufactured or sold by the licensee?
“Yes,” Mr Hartzer said.
“It opposes requiring annual as opposed to biennial opt-in notices for ongoing fee arrangements?” Mr Hodge asked.
“Yes,” Mr Hartzer said.
“It opposes structural separation between product manufacturers and advisers? Yes. In respect of consumer lending, it opposes any duty being imposed on intermediaries beyond that imposed by the Combined Industry Forum?” Mr Hodge asked.
“Yes,” Mr Hartzer said.
“It opposes a ban on trail commissions for intermediaries?” Mr Hodge asked.
“Yes,” Mr Hartzer said. (The bank has previously stated that “the existing model for mortgage broker remuneration is not inherently problematic”.)
While it is reassuring that the Westpac CEO backed trail commissions, the questioning by the royal commission marks the most explicit reference to a potential reform that could ban trail commissions for intermediaries.
“It opposes a ban on introducer programs?” Mr Hodge asked Mr Hartzer.
“Yes,” Mr Hartzer said.
“It opposes industry codes being given legal or further legal effect?” Mr Hodge asked.
“Yes,” Mr Hartzer said.
The royal commission asked whether one of the reasons that Westpac opposed each of those changes was because there would be “an effect on the profitability of Westpac’s business”.
While Mr Hartzer said that was “a component”, he said that it was “not the main driver”.
The big four bank CEO said that he was happy to go through each of its oppositions to the above-listed reforms, because the commissions had made it sound like it was “completely opposed to change, which [it is] not, but each of those points has subtleties around them”.
When asked whether there was a culture within Westpac that “is resistant to change”, the bank CEO responded in the negative.
The royal commission has been taking a line of questioning recently that has been taking a close look at commission payments.
On Monday (19 November), counsel assisting Rowena Orr asked CBA CEO Matt Comyn about broker remuneration, and it was revealed that the big bank CEO was in favour of moving to a consumer pays model (a statement that has been widely panned by major players in the broking industry) as he believed that it “best serves the customer”.
Further, Commissioner Kenneth Hayne also questioned Mr Comyn over whether he believed brokers deliver ongoing services to clients to justify the payment of trail commission.
On Wednesday (21 November), the royal commission also looked at commissions in the wealth and car dealer space.
The counsel assisting noted that Westpac had “turned off” grandfathered commissions in the wealth space because it “recognises that it is in its clients’ interests to [do so]”. He pointedly asked: “Surely, it was apparent, at least from the time of FOFA, that commissions were not in the interest of clients?”
The Westpac CEO said that the “commission is not necessarily against the interest of customer, but the issue was that with the structure of product commissions that was in place at the time, created the risk of advisers not acting in customers’ interest”.
*This article was updated on 22/11/2018 to reflect that the royal commission is considering a recommendation to ban trail. The commission does not have the power to ban commissions.
[Related: Major banks reveal thoughts on broker remuneration to RC]
