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 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.

Original Article published by Ben Faulks on The RiotACT.

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To some extent the RC’s recommendations seem to be overly focused on financial planners and brokers in terms of limiting their business model than it has the banks. The potential banning of upfront and trailing commissions is clearly going to be a hammer blow for many a small financial services firm. I am an accountant and think you need to be careful about any accusation of bad behaviour by financial planners, brokers etcetera and exemplary behaviour by accountants. Having said that in the last 6 months alone I have seen two people lose over $300,000 each on atrocious property investments financed with easy money and rolled out by brokers in bed with a property developer. The irony is both investments were in Melbourne, a so-called booming property market over the last few years but not for these two individuals. At the end of the day, had those two people been required to pay the broker a fee for the service, they would not have bought the properties. One of these clients is close to losing their house – serious stuff. I am not sure of what goes on in general but you do get the feeling this story has been repeated many times over. There is nothing like forcing someone to pay for a service to get them to think about what the service actually is. I still hold the basic view that it is the fact that this doesn’t happen, when it comes to financial services, that the RC has identified as being a fundamental problem. The collateral damage is the diminished profitability of ethical operators. I guess the RC is saying the unethical operators are such a serious problem they need to be knocked out albeit with a big broad stick that will also hit the good guys.

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