6 February 2019

Punishing mortgage brokers will only hurt consumers and benefit the banks

| Ben Faulks
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Banking royal commission

The Banking Royal Commission report is a death knell to the mortgage broker industry.

I keep trying to reconcile the Banking Royal Commission taking such firm action against mortgage brokers – and can’t.

Whilst there is no doubt that there are rogues in the industry who have profited by giving bad advice to their customers, these few provide a case for greater education and regulation – NOT putting a wrecking ball through an industry that predominantly supports mums and dads, most of whom essentially work for a fairly basic wage.

The mortgage broker is a customer advocate. They exist to benefit the uneducated consumer who would previously walk into a bank where they opened a dollarmite account as a six-year-old, and take on face value that the person behind the counter would do the right thing by them and offer them the best deal. My experience has been that bankers are typically good people, but in practice that does not happen. The product and rate which benefits the bank is what will be sold.

Ultimately the banks will be the only beneficiaries of the proposed changes to the mortgage broking industry, as many mortgage brokers are unable to earn a living by charging clients upfront, so they will leave the industry, and consumers will have to deal directly with the banks.

How does this teach the banks a lesson about the importance of culture and governance?

The Royal Commission has effectively given the big banks, portrayed for years as the villains, a ticket to exploit their position by reducing competition, and removing a large portion of the costs associated with writing a loan.

I don’t subscribe to hating the banks. Yes, executive pay is out of line, however the family story of my great-grandmother walking into the local bank manager’s office in Manuka as a widow in the 1950s and receiving support on a handshake, with no collateral, to start a tailoring business which allowed her to support her family is a great example of what an important and fiduciary role a good banker (or broker) can play in the community.

I worked for Macquarie Bank during the Great Financial Crisis of 2008, and the stability provided by our banking system (with government support) during this time is something I feel many of us take for granted. Other countries were not so fortunate, where corporate greed was more extreme.

I also find it hypocritical for many Australians to cry out against banks when they are the beneficial owners of the profits that they generate – many unknowingly through their superannuation. How many people have been secretly pleased by the bounce in bank stocks today?

If we are truly outraged by executive pay and the behaviour of the banks, then we should lobby the superannuation industry to exclude banks from their portfolios, driving down share prices and rendering many options held by executives worthless. But I don’t see that happening any time soon.

There’s also the practicality of banks having outsourced the application process for what I understand to be 60 per cent of all loans (my advice could be wrong on the actual percentage originated through a broker). How does a bank retool to handle this workload in such a short space of time?

Who cares you might ask? Well, we all should, as this will impact the availability of credit across the board, which will have a flow-on effect to a range of industries – my own included.

In every industry, there has been good and bad. For mine, this is a clear case of the majority of mortgage brokers being severely punished for the crimes of a few. This is not what I understood the Royal Commission to be about.

If either political party is serious about main-street jobs, creating competition to benefit consumers, and holding big business to their social and ethical responsibilities, then they will not enact the proposed changes to the mortgage broking industry.

Upfront commissions should remain (or increase) with greater disclosure and compliance similar to those introduced into the Financial Planning industry by Future of Financial Advice reforms. Trailing commissions should be payable on annual review, or delivery of a prescribed service, which delivers value to the customer on behalf of the bank. The system, when executed as intended, works.

And looking to the future, if we kill off the mortgage brokers, what happens?

Surely we are back here in 10 years with a consumer outcry about customers put into unsatisfactory loans by bank employees who are stretched beyond measure as a result of the Hayne Royal Commission. We will need consumer advocates to address these issues, and act to protect the interests of the customer. We will need mortgage brokers.

Or maybe we all just need to temper our sense of justice.

Disclaimer: I have previously owned a failed mortgage broking business, and also received commission payments from brokers for referrals. I retain the benefit of a trail book from the time of my business ownership (the benefit is 0.1 per cent of our total revenue), and proudly refer to a local broker whom I trust because he provides a good service to my clients. I have not held a financial interest in a mortgage broking company for the past two years, and do not intend to in the future. I do not own shares in any bank.

Ben Faulks is the CEO of Ray White Canberra.

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Trailing Commissions of any sort are a dreadful ripoff and should be banned.

How exactly is forcing mortgage brokers to be open and honest about what they are actually charging customers and getting paid, “punishing” them?

If a mortgage broker can’t work like other industries and charge a fee for service model then either they’re getting paid too much or their business model was always built on a house of cards.

This won’t benefit big banks, competition will still occur and if the mortgage broker business model doesn’t work, new opportunities for businesses will open up.

Should we prop up travel agents now that internet comparison sites and direct booking have mostly killed off their industry?

Innovate or perish, commissions and particularly trailing commissions were always dodgy, the conflict of interest too great.

Capital Retro8:24 am 07 Feb 19

For every door that closes, several open up.

I recall that 40 years ago some entrepreneurial finance brokers approached the trading banks and became introducers of business to them which was previously the exclusive domain of the finance companies – ironically a lot of the finance companies were bank owned.

At that stage the banks were only considering equipment leasing and hire-purchase business however some very smart financiers saw an opportunity to create “principal and agent” arrangements with some banks and this “third tier” was able to spread into general finance including home mortgage finance. The banks soon saw this could be future competition for them so they purchased the loans already on the books of the new lenders and developed the relationship between the broker and the bank to introduce more home lending business direct to the banks.

If the banks are now prevented from paying introducer commissions they will have to employ and train thousands of people to fill the void. Banks will also have to open more branches and work extended hours.

It is easier and smarter to re-introduce the old principal and agency agreements.

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