Borrowers and mortgage brokers will pay for the banks’ bad behaviour in the wash-up of the royal commission.
Collateral damage is a word that comes to mind when reviewing the recommendations from the Banking Royal Commission (RC) in relation to the mortgage broking industry.
Possible regulatory and legislative change threatens the mortgage broking industry, which could see all Australians having less access to smaller lenders and even less access to credit. As competition and choice declines, bank power and the risk of higher interest rates increases.
For a Royal Commission that was supposed to be centered around the misconduct of the Big Four Banks, the heaviest blow has been delivered to mortgage broking. Herein is where the failed logic lies. The RC revealed no systemic corruption by mortgage brokers, no sobbing witnesses, no forged documents, no cash-stuffed envelopes, no evidence of widespread corruption. All this appalling behaviour sits firmly in the domain of the Banks. Time and time again we heard stories of regular and widespread criminality and lack of action and neglect by the regulators around mortgage fraud.
You only have to look at the soaring Banks’ share prices yesterday (5 February 2019), which drove the share market to its biggest one-day rise in more than two years - to realise that a quick assessment by the market knows the RC will not affect Bank profits. By contrast, shares in the two largest Australian brokers, Mortgage Choice and Australian Finance Group, crashed more than 25 per cent.
The naivety of the RB commission to think that the a change in commission structure to Mortgage Brokers won't affect competition is mind blowing. Do we suddenly believe that banks will pass on the cost savings to borrowers (at not having to pay broker commissions) and reduce interest rates? The best predictor of the bank’s future behavior is their past behavior - which is NOT to pass on any savings to customers.
Did you know:
- Brokers drive mortgage interest rates down, which helps all borrowers.
- Brokers facilitate more than *59% of all Australian home loans and act as a shop front for smaller and non-bank lenders.
- More than half a million Australians take out a mortgage with the help of a broker each year.
- Brokers are critical in regional and rural areas where retail banks are less accessible.
- Mortgage Brokers contribute $2.9bn to the Australian economy each year.
By decreasing competition and eradicating mortgage brokers there will be a significant power shift and free kick back towards the banks. At the moment 59% of all mortgages originate through mortgage brokers. The reason why this is the case is that mortgage brokers offer choice, independent advice and an important service to those uninformed about the mortgage market.
Very little change is needed, the work has already been done
The reality is that very little needs to change with the mortgage broker marketplace. The hard work has already been done. The advent of the National Consumer Protection Act (NCCP) in 2012, there already exists a robust regulatory framework which Mortgage Brokers must comply with and operate within.
Under these regulations, commissions are disclosed to customers and agreed to before engagement commences. The legislation clearly states that everyone involved in the value chain of creating a mortgage must be responsible for the products recommended and ensure loans are not unsuitable for a borrower or put that borrower into a position they cannot afford.
A customer does have an enormous amount of choice and can choose to approach a bank directly and is not compelled to use a mortgage broker. The way in which commissions are negotiated between the banks and brokers affords efficient entry to the market and makes it extremely flexible for consumers.
Eroding choice and killing competition
Shifting to a fee-for-service model will erode choice and kill competition. For example, a commission received by a broker from a bank is funded by the bank but disclosed to the borrower. The model recommended by the Banking Royal Commission is for this fee to be paid by the consumer. This simply means it will be harder for the consumer to save for a deposit for a mortgage if they have to pay a separate upfront fee to a mortgage broker. Their option, of course, is to apply directly to a bank thereby creating a simple powershift towards the big four players and eradicating choice for the consumer.
There is a distinct difference in the way the Future of Financial Advice (FOFA) package of legislation works in the financial planning sector and what the Hayne Royal Commission is recommending for the mortgage sector. One industry deals in debt the other deals in wealth creation.
In order to understand why they are wrong we first need to understand how the mortgage broking industry emerged in the first place.
Back in the late 1980s the financial markets were then deregulated by Paul Keating. The impetus for doing so at the time was to create more competition in the marketplace and offer choice for consumers. Shortly thereafter a proliferation of second-tier banks and mortgage managers emerged that challenged the major banks on the distribution model. The spread between the reserve bank cash rate and the average mortgage rate of the big four banks at that time was 450 basis points.
As the industry continued to develop, the interest rate spreads charged by the banks between the cash rate mortgage rate began to erode. The banks responded by making efficiency changes and centralising branch networks and adopting an outsourced model of product distribution through mortgage brokers. At the height of competition created with this model over the past 30 years the spreads between cash rates and standard mortgage rates was as little as 150 basis points.
Reduced Access to Money
It is now harder to get a loan in Australia than it has been for 30 years, and by all accounts this will only get worse if Mortgage Brokers are taken out of the picture. At a time when borrowers need support and advice, their only independent avenue for this will potentially be taken away.
The last thing Australia needs is policy change that further entrenches power amongst the few lenders with large branch networks. Collins Home Loans will continue to work for our clients to ensure the best possible advice and support is available.
We have joined with the Mortgage Finance Association of Australia (MFAA) to seek support to protect competition and choice by ensuring the mortgage broker channel remains strong. Show your support by signing the online petition to keep choice alive at www.brokerbehindyou.com.au.
*Deloitte Access Economics – The Value of Mortgage Broking (July 2018).