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RC’s final recommendations revealed

The long-awaited final report of the financial services royal commission has been released to the public, containing Commissioner Kenneth Hayne’s recommendations for reform in the mortgage industry. 

The federal government has released the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry containing the recommendations of Commissioner Kenneth Hayne, determined following a year-long inquiry that commenced in January 2018.  

The final report outlines recommendations designed to address systemic issues raised throughout the commission’s seven rounds of public hearings, which included consumer lending, financial advice, SME lending, the experiences of regional and remote communities with financial services entities, superannuation, insurance, and a review of policy issues raised throughout the inquiry.

Commissioner Hayne has not recommended formal changes to the National Consumer Credit Protection (NCCP) Act for direct lending or revisions to the “not unsuitable test” to address concerns raised over the assessment of loan applications.


“The NCCP Act should not be amended to alter the obligation to assess unsuitability,” he said. 

Commissioner Hayne observed: “The double negative ‘not unsuitable’ does seem clumsy and, at first sight, may be thought no different in substance from the lender being required to determine that the loan is ‘suitable’ for the borrower,” he said.

“But there is an important practical difference between the two tests. The ‘not unsuitable’ test may be described as directed to avoiding harm. By contrast, asking about suitability invites attention to whether there is benefit to the borrower.

“The inquiries and verification required by the NCCP Act put the lender in a position where it can assess whether making the loan is unsuitable because it is likely that the consumer will be unable to comply with the consumer’s financial obligations under the loan or could only comply with them by enduring what section 133(2) refers to as ‘substantial hardship’. Those inquiries and verification are not suited to assessing what, if any, benefit the consumer will gain by borrowing.”

While the NCCP Act will not change the 'not unsuitable' test, the commission is calling for mortgage brokers to be held to a 'best interests' duty.

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"I consider 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," he said.

However, the commissioner has called for amendments to the NCCP Act if the federal court finds “deficiencies” in the NCCP Act in its assessment of the Australian Securities and Investments Commission’s (ASIC) case against Westpac and its use of the Household Expenditure Measure (HEM) to judge the suitability of home loan applications.

“If the court processes were to reveal some deficiency in the law’s requirements to make reasonable inquiries about, and verify, the consumer’s financial situation, amending legislation to fill in that gap should be enacted as soon as reasonably practicable,” he said. 

Commissioner Hayne questioned the use of HEM in his interim report, claiming that its use “does not constitute any verification of a borrower’s expenditure”, adding that “much more often than not, it will mask the fact that no sufficient inquiry has been made about the borrower’s financial position”.

In his final report, Commissioner Hayne has said that he “remains of that view” but acknowledged that lenders were taking steps to implement broader serviceability assessments.  

Several lenders, including the Commonwealth Bank of Australia (CBA), NAB and Westpac have backed the use of HEM as a benchmark in their responses to the interim report.

CBA asserted that the HEM was “legal” and ”appropriate”, with NAB and Westpac adding that it has served a “safety net” or “backstop” that has been applied alongside other assessments of a borrower’s living expenses.

The Australian Prudential Regulation Authority (APRA) also defended the use of the HEM benchmark, stating that there is “a role for a benchmark to address borrowers’ difficulties in estimating expenses and instances where expenses appear to be too low”.

However, despite the expression of support for the HEM benchmarked, CBA and ANZ have both revealed that they’ve sought to reduce their reliance on the benchmark.


Further, Commissioner Hayne has also recommended changes to the remuneration structure in the third-party lending channel and reforms to remuneration incentives offered to bankers.  

Commissioner Hayne has recommended that commission should be paid for by the consumer.

The final report reads: “The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.

“Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.”

Commissioner Hayne continued: “Value-based commissions paid by lenders to mortgage brokers are a form of conflicted remuneration. That is, value-based commissions are a form of remuneration that can reasonably be expected to influence the choice of mortgage, the amount to be borrowed, and the terms on which the amount is borrowed.” 

The commissioner also called for changes to trail: “The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing. Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come? It cannot be that they are deferred payment of fees earned earlier when the amount paid as trail depends upon the length of the life of the loan.”

However, recent data from Momentum Intelligence’s Consumer Access to Mortgages Report shows that the vast majority of mortgagors are not concerned by broker remuneration.

Ninety-six per cent of borrowers who had used a mortgage broker in their most recent experience were either “satisfied” or “very satisfied” and that nearly 80 per cent (78.6 per cent) of borrowers who have used or intend to use a mortgage broker “have no concerns with this structure”.

Government to act on all 76 recommendations

Following the release of the final report, Treasurer Josh Frydenberg called for a permanent change to the culture in the financial services sector.

“From today, the banking sector must change and change forever,” Treasurer Frydenberg said.

“In Commissioner Hayne’s own words, there can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned, their boards, and their senior management.

“The undeniable fact, Commissioner Hayne said, is that it is those who engaged in misconduct who are responsible for what they did and the consequences that followed.”

He continued: “My message to the financial sector today is that this misconduct must end, and you must put the interests of consumers first.

“Consumers must be treated honestly and fairly.”

Mr Frydenberg also revealed that Commissioner Hayne has referred 20 cases raised throughout the hearings to APRA and ASIC for further investigation and outlined the government’s commitment to act on all 76 recommendations issued in the report.

“My message to the Australian community today, is that your government is committed to making this happen,” he said.

“In responding to this report, and taking action to all 76 recommendations, we are putting in place the legislative framework, which provides regulators with the powers and the resources, to hold those who abuse our trust to account.  

“If nothing else, the public is entitled to expect that the law is applied and enforced.”

He added: “In outlining the government’s response to the royal commission, I want to make clear that our principal focus is on restoring trust in our financial system and delivering better consumer outcomes while also maintaining the flow of credit and continuing to promote competition.

“These objectives are vital to the health of our economy and are therefore vital to the health of the community.”

CEO of the Australian Banking Association (ABA) Anna Bligh apologised on behalf of the banking sector.

“Banks accept full responsibility for these failings and know that they must now change to ensure this never happens again,” she said.

“Banks are determined to learn the lessons, fix the problems and make it right.

“Australians expect better from their banks and they deserve better.”

Ms Bligh added: “This report contains some very tough medicine for banks, including potential court cases.

“The industry has already formed a Taskforce to begin the work that will be needed to get this job done.”

Find out more about what the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry means for the broking industry, and what the next steps are, by attending the Better Business Summit 2019.

Running across five different states every Thursday from 14 February, the Better Business Summit provides brokers with straight-talking, practical advice to help them grow and improve their businesses in this time of change.

Tickets are selling out – so make sure you secure your ticket today to stay ahead of the curve and prepare your business.

[Related: Government cautioned as new data flags market dip]

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