The Royal Commission was charged with uncovering misconduct in the banking and wider financial services industry. The major banks were intended to be the primary target of the investigations. Instead, it seems the innocent bystander –the mortgage broker – stands accused. Not of wrongdoing, but of receiving potentially conflicted remuneration. By contrast, some of the testimony against the major banks was horrific. Yet , the Commission has chosen to penalise mortgage brokers over banks, leaving the banks’ core business largely unchanged. Here’s why I believe Commissioner Hayne got it wrong for brokers, and what action we can take in response to Hayne’s recommendations:
1. The flawed user-pays system
First home buyers, those from low socio-economic backgrounds, and those with low financial literacy, are the ones who can least afford to pay for brokers’ services. They are also the ones who need brokers most. The user-pays system recommended by Hayne will harm those who need brokers most, when they are making the most expensive purchase of their lives. This especially at a time when acquiring, in many cases, the largest asset they will own. Let’s face it: stamp duty, mortgage tax, removalists fees and legals can’t be avoided. So, consumers being asked to reach into their pocket to pay yet another fee are going to struggle.
2. Reducing market efficiency
Let’s also do the simple maths on the costs of refinancing: today say $1,250 in administrative costs is charged; but if the borrower is required to pay a “loan arrangement fee” (regardless of whether this goes to a lender or the broker) – let’s add say another $2,500. If Hayne has his way, all of us who have a home loan will suddenly face a tripling of the cost of refinancing. The result? It will be cheaper to stay with a funder who has higher rates because the cost of switching is too high. Which means the broker who helps keep the banks competitive (by refinancing clients when banks reprice their back-book) are rendered ineffective by the tripled cost of switching. How does that help competition and keep the banks in line?
3. Consumers prefer brokers, not banks
Consumers have increasingly chosen to use mortgage brokers over going directly to banks. The broking channel has many advantages, including ease of use, cultural alignment and accessibility. Consumers have increasingly voted with their feet. It’s no accident that 60% of people prefer using a broker. Among those users,there’s a 96% satisfaction rating. With these figures, does the potential for conflicted remuneration really warrant the removal of commissions? This is a kin to me deciding I would love to have a family and kids – but they might fight – and there may be “conflict”. So, let’s mandate celibacy!
4. Reduced competition
Very few banks have distribution networks across Australia, especially in rural areas. If consumers can’t access alternative funders because distribution channels have been cut off, then competition is restricted. Our small Australian market needs more, not less competition, to provide better choices for home buyers. Look at the case studies of the reduction in bank competition in the Netherlands or in jurisdictions where broker commissions were switched off only to be switched back on. Can’t we learn from others’ mistakes before we repeat them?
5. Built-in checks and balances
Commissioner Hayne is concerned that brokers could recommend loans with higher interest rates, or larger loans, in order to get bigger trail commissions. His solution? Abolish trail commission and eventually, abolish all upfront commission. But this misunderstands the separation in the role of the broker and the funder. It’s the broker who submits the loan and the bank that ultimately approves it. The broker certainly does not run credit.
It is little wonder that the Productivity Commission concluded:
“Fixed fees paid by customers rather than commission structures have been proposed,and would eliminate conflicts, but the cost to competition would be high.Consumers would desert brokers, and smaller lenders (and regional communities with few or no bank branches) would suffer much more than larger lenders, if customers were required to pay for broker advice.“
So, what now?
If enforced, Commissioner Hayne’s recommendations will punish not the banks who charged dead people, but consumers and brokers. I see the punishment,but I am struggling to see the crime. It’s as if an industry has been judged“guilty” before any misconduct occurred! The debate has entered the political arena and the “talk tough” posturing is being used to win votes in the next election.So, what can you do? Unite like never before. Rally the support of those who have happily used your services. There are literally hundreds of thousands, if not millions of happy consumers who can testify to the value of brokers. Call on them. Ultimately, politicians are interested in votes and re-election, so make it about consumers and voters, not you and broking. If enough Australians express outrage, the Hayne recommended life sentence has a good chance of being modified and selectively implemented, rather than being blindly enforced.
Join me in the lobbying the Government here:
https://ift.tt/2GxTHkU
And show your support for the broker channel here:
https://ift.tt/2NjJSI6
As Martin Luther King Jr once said, “Our lives begin to end the day we become silent about the things that matter.”
Regards
Jeff Zulman
