You’ve probably noticed the media frenzy surrounding the financial services sector has reached fever pitch this week with the release of the findings from the Banking Royal Commission. But what do these recommendations mean for small businesses in financial services and those who rely on them?
On Monday afternoon, 4 February, the government released the full report of Justice Kenneth Madison Hayne’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, along with its response to each of its 76 recommendations.
The news is good for the general public, as the government’s broad support of the report’s findings should result in an improvement in integrity for the financial services industry.
And there’s good news for small business owners, too.
But before unpacking its findings, here’s a recap on what a Royal Commission is and how this one came about.
In some countries and jurisdictions, when an investigation needs to be made about a highly contentious and controversial topic, a Royal Commission into that topic can be established in order to get to the heart of the matter and resolve it.
In Australia, 136 different royal commissions have been held (with the first one dating back to 1902) and have covered a wide variety of significantly complex issues that our country has faced over the years.
A Royal Commission is normally led by highly experienced (and sometimes retired) judges and can last several years at a time.
One of the major parts of any royal commission is that individuals and entities are invited to submit their own documents containing information about past experiences that relate to the investigation. The judge then reviews these submissions and formulates an opinion after considering all factors.
In the years leading up to this particular Royal Commission, politicians and country leaders created campaigns to lobby for such an investigation to take place, claiming that financial institutions had no one to answer to and needed to be placed under a renewed and stricter set of regulations.
This investigation came about due to stories of illicit and unlawful behaviour coming from some of Australia’s largest banking institutions and financial service providers raising many questions about the integrity of their general practice.
Finally, towards the end of 2017, the Turnbull government announced the establishment of a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The Royal Commission came to an end on 1 February when Justice Hayne handed over his final report to Australia’s Prime Minister and Treasurer, which contained 76 recommendations about all things relating to this particular industry. You can find all of this information online if you’d like more detail.
A few days after the final report was handed over, the Prime Minister and Treasurer released their response to the report, saying that not only were they “taking on” all of Hayne’s recommendations, but they also intended to “go further” than those recommendations in a “number of important areas”.
While the 76 recommendations covered a wide range of issues relating the banking, superannuation and financial services, there are three key areas that have direct relevance for SMEs working in the financial services sector, or those relying on the support of financial services.
Unlike specialised service providers such as doctors and lawyers, there has never been a mandate for financial advisors to register with any sort of regulatory body in order to be granted permission to provide services.
However, one of Hayne’s recommendations were that this process needed to change, and a thorough registration process be established for financial advisors for them to begin offering services.
While there is speculation that the increased costs of establishing such a process will deter people from turning to financial advisors, the hope is that through this newly formed process, financial advisors will offer a more streamlined and regulated form of services to their clients.
There were many who expected that the recommendations bring changes to the rules pertaining to small business loans – but as part of the final report, Hayne stated that “with some exceptions”, he didn’t see a need to make any changes to those rules.
However, Hayne did say that the definition of the size of a small business was “too confined” and recommended expanding the definition to include businesses with an annual turnover of $5 million and up to 100 employees.
Another one of the key recommendations from the final report was that mortgage brokers would need to make significant changes to their commission structures, including the banning of trailing (another way of saying ongoing) commissions.
While mortgage brokers around the country have taken the move to ban trailing commissions quite harshly, the intention of this change is to ensure that mortgage brokers act in the best interest of borrowers – an area that Hayne found to require significant improvement.
In addition to the above, just like other financial advisors, the report recommended that mortgage brokers also be required to register with a regulatory body before being allowed to offer their services.
The common thread between these (and the other) recommendations was that businesses in the financial services industry needed to raise their governance standards and shift focus to ensure that their they always act in the best interest of their clients – a change that, if successful, can improve the quality and integrity of the Australian financial services industry, and that will offer direct benefits to small businesses and consumers alike.