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Punishing mortgage brokers will only hurt consumers and benefit the banks

By Ben Faulks 6 February 2019 13
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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13 Responses to
Punishing mortgage brokers will only hurt consumers and benefit the banks
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Ben Roberts 12:07 pm 08 Feb 19

Perverse outcomes aplenty for consumers I'll give you the tip.

Tramcar Trevor 11:11 am 08 Feb 19

Well the problem is that one bad apple ruins the entire crate full... From my perspective we have a problem when an individual can't get a loan from a bank yet a broker can get a loan from the same bank. Something in that equation does not balance. In fact it is the customer paying extra fees that actually secures the loan because the fees the broker charges are eventually paid by the client in an underhand way...

Justin Watson 10:46 am 08 Feb 19

The issue I have with this RC is there were many things not in scope because the LNP protected the banks to some extent. Retail banking was not in scope so things like fees were not even touched.

franky22 8:54 am 08 Feb 19

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

Melissa Lovell 7:49 am 08 Feb 19

#notallbrokers ;)

chewy14 3:56 pm 07 Feb 19

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.

Braids Brady 8:49 am 07 Feb 19

This article is simply an emotive plea with no substance - it doesn’t address the issues raised by the royal commission at all. You can’t just wipe that all away with “most of us are good guys so don’t change anything” when there was clear evidence of many people being ripped off, and a clear lack of regulation in the industry.

The mortgage broker industry has avoided, lobbied, and pushed back on any moves to regulate the industry over the last 15 years. I feel if they hadn’t been so vehemently opposed to that, maybe these ‘bad eggs’ that you’re all being punished for might have been dealt with - and the industry wouldn’t be in this position.

    Gary Harpur 10:17 am 09 Feb 19

    You obviously have little to no understanding of the mortgage broking business or you wouldn’t have made these stupid comments. All that has happened here is the banks are off relatively unscathed (as evidenced by the surge in their share prices) and the mortgage brokers have copped it in the neck. In a nutshell the all the royal commission has done is “rob Peter (the broker) to pay Paul (the bank). So please keep your insensitive uninformed comments to yourself.

    Braids Brady 10:21 am 09 Feb 19

    Gary, I don’t disagree that the banks shouldn’t have gotten off worse, or necessarily that there wasn’t a better way of dealing with the unfettered lack of regulation in the mortgage broker industry.

    I was stating that saying nothing should be changed because it will hurt the industry ignores the point that the RC found that the industry as a whole (good and bad apples) was screwing over people and needed changes.

Capital Retro 8:24 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.

Robert McMahon 10:09 pm 06 Feb 19

Totally agree.

Stan Vizovitis 5:33 pm 06 Feb 19

Still doesn't help get anywhere with claims against them

Peter Bee 5:18 pm 06 Feb 19

Many brokers are “owned” by the banks. The reforms purposed will clean out the large minority of those that don’t rep their client honestly.

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