Update 12 March 2019
Collins Home Loans welcomes the commitment by the Morrison Government to protect and support the mortgage broking sector and in doing so ensure that competition in the residential housing market remains strong. The acknowledgement that mortgage brokers are critically important for competition and for delivering better consumer outcomes in the mortgage market is welcomed.
Collateral damage is a word that comes to mind when reviewing the recommendations from the Banking Royal Commission in relation to the mortgage broking industry.
Possible regulatory and legislative change threatens the mortgage broking industry, which could see Australians with less access to smaller lenders and even less access to credit. The consequences of these changes is that as competition and choice declines, there will be a significant power shift and free kick back towards the banks.
Currently in Australia, 59% of all mortgages originate through mortgage brokers. Mortgage brokers have continued to prove their worth to the Australian consumer by offering choice, independent advice and an important service to those uninformed about the mortgage market.
Over the last 15 years, Mortgage Brokers have successfully tempered the dominance of the Big Four Banks and impacted positively on competition, by directing much of their business to lenders other than the Major Banks and their affiliates. More than half a million Australians take out a mortgage with the help of a broker each year. Mortgage Brokers contribute $2.9b to the Australian economy each year.
For a Royal Commission that was supposed to be centered around the misconduct of the Big Four Banks, the heaviest blow has (inadvertently perhaps) been delivered to mortgage broking. The Royal Commission did not reveal any 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 criminality and mortgage fraud as well as a lack of action and neglect by the regulators.
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 Royal Commission will not affect Bank profits. By contrast, shares in the two largest Australian broker aggregates, Mortgage Choice and Australian Finance Group, crashed more than 25 per cent.
The devaluing of mortgage brokers may result in:
- Diminishing availability of credit – especially for customers in regional and rural Australia.
- Less access to credit for low income customers with more complex credit needs such as first home buyers.
- Directly impacting on 17,000 small businesses across Australia.
Very little change is needed, the work has already been done
The advent of the National Consumer Protection Act (NCCP) in 2012, means that much of the hard work and regulatory change has been done. 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 have the effect of eroding choice and creating a simple but effective power shift towards the Big Four Banks. Under the current model, 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 for 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.
The recommendations will destroy the viability of the mortgage broker channel, which in turn would immediately reduce competition, limit access to finance – especially for those in rural and regional areas – and drive customers back into the branches of the banks with the largest branch networks.
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).