Broker commissions could be reduced and capped as a result of regulation, according to an industry information research company.
In its report, IBISWorld has outlined the potential effects of the Royal Commission on banks, the financial services, shareholders and customers.
It outlines higher capital requirements, tighter regulation and high costs of adopting and implementing changes.
It also looks at how the Royal Commission questioned possible conflicts of interest between mortgage brokers and customers with the remuneration structure. In many cases brokers work directly with bank-owned aggregators and were accused of directing customers to those banks. Trail commissions would be much higher for brokers when customers took on larger mortgages and repaid them over a longer period of time.
IBISWorld senior industry analyst Tommy Wu said, “Commissions for mortgage broking could replicate the approach in life insurance remuneration, where regulators have reduced and capped ongoing and up-front commissions. This will be the case if financial institutions remain vertically integrated, as highlighted by Westpac revising its remuneration model.”
Wu also suggests that the immediate outcome of the Royal Commission will be tightened lending standards for consumers and businesses, which should provide opportunities for other banks and non-bank lenders.
Banks could potentially become smaller, moving away from other services and going back to basics in terms of their core business of lending. This has already started to happen, with several of the major banks divesting their wealth management businesses.
Greater compliance, combined with increased scrutiny, has led to banks offloading these divisions, especially as investment returns have weakened for these businesses.
Wu said, “This move away from providing advice and scaling back operations will help reduce risk for the major banks, minimising the potential for further significant regulatory trouble.”
Wu added the outcome of the commission will likely have a broad impact on banks and their shareholders. Revenue in the National and Regional Commercial Banks industry is expected to decline at an annualised 1.4% over the five years through 2017-18, to $148.2billion. This is down from $159billion in 2012-13.
He said, “The Australian Prudential Regulation Authority (APRA) has already announced its intention to raise capital benchmarks to unquestionably strong levels, with banks expected to meet these levels by 1 January 2020. This already represents a significant cost to the major banks and their shareholders.
“The Commonwealth Bank (CBA) will be particularly under pressure, with APRA slapping an extra $1billion capital charge on the bank following the Prudential Inquiry into the bank. This charge will remain until the inquiry’s recommendations are met. This potentially puts CBA in the weakest capital position of the major banks.”
