The Australian, February 8, 2019
Commissioner Kenneth Hayne’s recommendations in his final report into misconduct in the banking industry have immediately jeopardised the survival of more than 17,000 small businesses across Australia.
That’s the number of mortgage brokers who rely on upfront and trailing commissions paid by the lender to survive. Take those commissions away and make the mum and dad borrower pay, and you will decimate the industry.
That’s tens of thousands of jobs, millions of dollars in tax revenue and much less competition for the big banks.
The recommendations have also put in jeopardy more than 100 small lenders in Australia — lenders that have shifted into regional areas to partially fill the void left by the big banks moving out. Those small lenders, including regional banks and credit unions, rely on mortgage brokers to reach customers.
The consequences of Hayne’s mortgage broker industry recommendations will be
far-reaching for small businesses, consumers and our economy. And they won’t be positive.
There are several flaws in the royal commission report relating to the home lending market. Hayne shows little knowledge of how the mortgage market works.
The first flaw is a lack of understanding about what a mortgage broker does to earn their upfront and trailing commissions. A mortgage broker helps a customer select a home loan based on their financial situation, needs and ability to repay the loan. They compare loans, help the customer negotiate a lower interest rate, and use their knowledge and contacts within the industry to find the most suitable deal.
Once the customer has decided on the best loan for them, mortgage brokers help customers fill out the loan form, liaise with solicitors before settlement and often do a full assessment of the creditworthiness of the borrower. They are regularly responsible for chasing documents, such as pay slips, to verify eligibility. Then they submit the form to the lender. Once the lender approves the loan, the mortgage broker assists with the loan documentation and liaises with the lender, solicitors and anyone else involved in the transaction to allow the customer to get the money. No one else in the home lending sector provides a single co-ordination point for all this.
Knowing what is going on in the market is very important if the customer wants the best deal. Which bank has the best deal for fixed-rate loans this week? What lender is looking for long-term home loans? Who wants to lend to agribusinesses? Mortgage brokers know what’s going on in the market. Consumers don’t.
I can’t imagine someone walking into Commonwealth Bank and being refused a loan, only to hear the customer service representative suggest they go down the road to ANZ.
If the government undermines the mortgage broker community, there will be far fewer loans provided. Almost 60 per cent of us use a mortgage broker. Take that service away and fewer people will buy houses. The Reserve Bank has already said the economy is vulnerable to shocks in the property market.
The second flaw is Hayne recommends that borrowers, not lenders, pay the upfront fee. It means the borrower will pay the fee twice. At the moment, the mortgage brokers receive a commission paid by the lender and the customer gets the loan. Under Hayne’s recommendations, the borrower pays the fee and the bank gets to pocket what it used to pay the mortgage broker. Hayne didn’t tell the banks to reduce interest rates to make up for the additional money they’ve made on the home loan.
So customers will pay twice — once when they set up the loan and once when they pay the interest on the loan.
The only way around this is to force the banks to refund the fee to the borrower, or to have them charge a lower interest rate, at least for the first year. Hayne wants to punish the mortgage brokers and reward the banks.
The third flaw is that forcing the borrower to pay the upfront fee to mortgage brokers means families will take longer to buy a house. It’s already very tough to save for the deposit and have enough for stamp duty, administration fees, legal and other fees. Adding another cost upfront will put home ownership out of people’s reach for longer, particularly first-home buyers.
The fourth flaw in the Hayne commission’s recommendations on mortgage brokers is critical. If you undermine the mortgage brokers’ viability, smaller lenders lose access to customers and will start closing. The only winner will be the big banks.
Already the number of small lenders is shrinking. Excluding the big five banks — ANZ, Commonwealth Bank, NAB, Westpac and Macquarie Bank — there is half the number of lenders available to home loan customers than there were 12 years ago.
Regional banks and credit unions haven’t got the money to open branches in Sydney or Melbourne, or regional Western Australia or far north Queensland. They don’t need to because mortgage brokers do the job for them, helping them reach thousands of customers.
If mortgage brokers become unviable, so, too, do dozens of lenders. Market power shifts back to the big banks and interest rates will go up. Customers lose out.
Just look across the ditch. No trail is available to mortgage brokers in New Zealand, but the upfront payment is almost twice as much as here. It’s not because the mortgage brokers are greedy. It’s because they need that much upfront commission to stay afloat.
Hayne has got these recommendations wrong. The Coalition government and Labor are blindly walking into a huge trap by abolishing trailing commissions. Bill Shorten and Scott Morrison need to consult with the industry before making these sweeping changes or they risk enormous fallout.