Royal Commission Report
Finance Broking has certainly been in the headlines over the last month. It has proved to be a tumultuous time with the Royal Commission final report being released to the public and recommendations outlined from the Commissioner, the Honourable Kenneth Madison Hayne AC QC.
There was a total of 76 recommendations from Commissioner Hayne. The most widely anticipated recommendation for mortgage brokers was to abolish the current remuneration structure.
It is now confirmed that Hayne does recommend a change to broker commissions, encouraging a flat fee for service to be paid by the borrower.
The core philosophy behind the report is to remove any conflict of interest for the mortgage broker. The report says, “The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending”.
Whilst the philosophy isn’t necessarily wrong – finding the right solutions requires consultation and a level head.
Mortgage brokers provide a very important service to borrowers across Australia. Data shows that customers value the service that a mortgage broker provides, with this industry now accounting for almost 60% of all home loans written. The Federal Government have recognized the critical role brokers play and encourages all sides of politics to constructively engage with the mortgage broking industry and borrowers to understand the valuable and vital role brokers play in the Australian lending market.
Independent research shows 58% of consumers will not be prepared to pay an upfront fee for a home loan, so any move to change the current system could cause significant negative repercussions for the industry and Australian borrowers.
Consumer protection and competitive neutrality must be key to any reforms introduced. It is important to note that 66% of the loans provided were with lenders outside of the big four banks.
Across Australia there are more than 8000 mortgage brokers operating small businesses in hundreds of local communities. They help tens of thousands of customers every year. Consumers, small business owners, their employees and families, smaller lenders and others have the potential to be negatively impacted by the proposed reforms.
It is imperative to protect consumers and competition in the home loan market. The expected outcomes if all of the recommendations are implemented include reduced competition in the lending market, tightened access to credit, less choice and higher interest rates making it a lot harder and a lot more expensive for consumers to purchase a home.
What happens next?
There will be a public consultation within the sector just because it’s a controversial move. Then a bill will be put forward in front of the parliament and with support it will pass.
Some of those recommendations do not need legislation, like the ones that deal with the regulators like ASIC enforcement because this is something that can be done internally.
For broker remuneration you need to regulate how much remuneration is paid, so if a broker can not get paid by the banks then probably this will most likely require legislation.
Debates & Conclusions?
Speaking to Australian Broker, FBAA Executive Director, Peter White said the decision has “handed power back to the banks”. The move would just hand back monopoly to the big banks that are not renowned for their great customer service and advice whilst increasing their profit margins.
It’s a huge concern and I worry it will turn a customer-service based profession into a transactional-based sales industry which is the exact opposite of the intent of the Royal Commission. The recommendation really did not consider the consumer in this recommendation.
Brokers are paid by the lender because it is a supply side cost – it’s a cost of distribution. Brokers provide immense direct value to consumers. They provide choice, transparency, guidance, and long-term, trusted relationships. Abolishing trail commission and considering replacing it with fee-for-service model would render broking a service only the wealthy can afford; when in reality, it’s needed more by first home buyers, low-income earners and those in rural areas.
Ongoing review of client loan products and features, administration and clerical works like fixing rates or switching a loan product which we currently do as part of our services would have to now be billed to customers instead, which is not the outcome anyone is looking for.
Whilst reform is not a bad word and we encourage reform that offers competition, transparency and service – we have watched over the ensuing weeks – Industry and political groups engaging in more consultation and we can only hope that common sense will prevail.
We can only hope the opportunity to have our balanced and professional arguments heard, with the consumer front of mind whilst we continue to serve our clients and hope that logic will be applied.
At Celsius we hope we have provided our finance clients “value for service”. Whether it be by adding something positive to your buying experience, making life easier for you, saving you money or even just by having a person to talk with about your finances… and we hope to still be doing that for our Clients for years to come.
If you would like to discuss this matter and how it may impact your situation, contact me on 0418 903 954 or donna-lee@celsius.com.au
warm regards,
Credit Advisor
Celsius Finance