As the reporting embargo was lifted and our news feeds came to life at 4:30pm on Monday afternoon, it’s fair to say many observers would have greeted the recommendations released in the Royal Commission’s Final Report into Misconduct in the Banking, Superannuation and Financial Services Industry with disappointment.
In addressing the issues raised by the Royal Commission, Commissioner Kenneth Hayne seemed to favour tweaks and stronger reinforcement of the existing law rather than advocating for any sweeping wholesale changes.
However, this wasn’t true of the Commissioner’s recommendations on mortgage broking.
Let’s make things clear - there is certainly a case for making brokers more accountable for the loan applications they submit. So too is the crucial need for both brokers and banks to be more diligent when considering the needs of borrowers and their ability to make repayments.
But I’m struggling to see the basis for some of the assumptions and recommendations that have appeared in the final report in relation to mortgage broking.
One of the paths the Commissioner has recommended is for mortgage brokers to essentially be subject to the same laws as financial advisors who provide personal investment advice.
The difference here is risk.
While not insignificant, mortgage brokers are simply handling a lot less risk on behalf of their clients than a financial advisor who, if they get things wrong, are likely to have exposed the life savings of their clients.
Just as puzzling is the attention given to mortgage broker fees, particularly the commentary which has stated that trail commission serves no purpose.
In fact, trail commission was intended to address a very specific issue - one which seems to have been forgotten.
Some commentators are talking about how they’re tired of people referring to unintended consequences which aren’t defined, but I can define a consequence of removing trail commission - brokers will increase churn. That’s when a broker encourages a client they helped get a loan for previously to get a new loan when there may be no benefit to the client in doing so, with the aim of being paid another up-front commission.
We like to think that brokers wouldn’t do that, but as the public hearings in the commission have shown us, the reality is that when’s there’s money involved people push the boundaries of what’s acceptable if there’s nothing to explicitly stop them doing that.
So are we really doomed to repeat the errors of the past where brokers were incentivised to churn their customer base every couple of years through different lenders just to make more income?
That’s not good a good outcome for the lenders and it’s certainly not good for the customers.
Also in Commissioner Hayne’s line of fire were upfront fees. Under the recommendations of the Report, customers would be required to pay an upfront fee to use a broker.
At the moment brokers write over half of the mortgages in Australia and while I’m not saying that there aren’t issues with how the system works, I do think that requiring customers to pay an upfront fee will ultimately discourage the use of brokers and simply drive more people to banks they're familiar with.
The result? This will likely just entrench the big banks even further.
Already the Federal Government has committed to a ban on trail commissions on new loans from July 1, 2020, but it remains more guarded on its position on upfront fees. Meanwhile Labor appear to be committed to implementing all of the recommendations made by the Commission, at least in principle.
Ultimately the recommendations on mortgage broking are just one part of the Report, and like the changes proposed to superannuation and the watchdogs APRA and ASIC, only time will tell as to their impact on brokers, banks and customers.
But it’s clear that there’s an appetite among a lot of Australians for home loan guidance from a party that isn’t tied to a particular bank.
And, unfortunately, it’s my opinion that these proposed changes to broking are more likely to erode the value of the system rather than provide more protection and choice to consumers.