Australia’s 31st Prime Minister, Bill Shorten, is set to hand the big banks a fee and revenue bonanza. He says that an incoming ALP Government will implement in full all the 76 recommendations from the Royal Commission. This includes Commissioner Hayne’s ideas about the mortgage broking industry.
Hayne and his team of lawyers have made 5 recommendations about “intermediated home lending” or mortgage broking. The first, that the law should be amended such that mortgage brokers must act in the best interests of the intending borrower is sound and arguably, should already have been in place. Strengthening reporting about misconduct and regulating mortgage brokers under the same laws that govern the conduct of financial advisers also makes sense.
But the big recommendation, and the one that will make the big banks richer, is to eliminate all commissions. The consumer, not the lender, should pay the fee to the mortgage broker.
A user pays system, free of conflicts.
Hayne sees this fundamental change to the industry happening over two to three years, first by prohibiting lenders from paying trail commissions on new loans, and then prohibiting lenders from paying other commissions.
This has the major banks licking their lips because it will lead to the demise of the mortgage broking industry. With mortgage brokers out of the way, the major banks will save around $2,400 per loan in upfront commission and then the same again in ongoing trail commissions (on an average loan of $400,000, banks typically pay upfront commission of 0.60% and then a trail commission of 0.20% pa.) They will also increase market share, as mortgage brokers won’t be around to promote the loans of the pesky minor banks and smaller credit providers, who don’t have large branch or proprietary distribution networks.
Why will it lead to the demise of the mortgage broking industry? Simply, Australian consumers won’t pay directly for the service, or if they do, not enough to make it profitable to run a mortgage broking service.
All the evidence, be it in financial advice, superannuation, insurance, real estate, the travel industry etc. is that Australian consumers are very reluctant to pay directly for “intangible” services. That’s why so few Australians have a financial adviser, there are so many self-managed superannuation funds, insurance brokers are paid by the insurer, real estate agents are paid by the seller out of the sale proceeds and travel agents are paid by the airline or travel provider.
Australians are tight and don’t like paying. They certainly won’t want to fork out around $5,000 for a loan.
Hayne acknowledges this problem. Firstly, he suggests that the brokerage service fee could be capitalised in the loan amount and repaid by the consumer over the life of the loan. In other words, consumers would take out bigger loans so they could pay the mortgage broker.
And then his craziest idea – that banks charge an additional fee to consumers who deal with them directly. That’s right, another bank fee! An establishment fee by any other name, but only paid by borrowers dealing directly with the bank.
“As I have indicated, it may be that to create a level playing field between banks and brokers, banks should be required to charge a fee to direct customers based on the costs that are incurred by the bank when there is no broker”.
He then goes on to suggest that the ACCC should be responsible for monitoring the fee.
For those with short memories, establishment fees were charged on most home loans up until a decade ago. As competition in the industry picked up, banks realised that establishment fees were a big turn-off for consumers and eliminating them was an easy market differentiator that led to an immediate boost in share. A thing of the past, it has now turned the full circle with some banks paying customers an upfront bonus to take out a loan. A “negative” establishment fee. This experience is further testament to the fact that consumers don’t like paying
Commissioner Hayne’s recommendation is wrong, not theoretically, but practically. His ideas to address this (capitalisation and an establishment fee) aren’t going to be welcomed by consumers. And the big banks won’t say too much because it is in their collective interests to see the mortgage broking industry suffer and dwindle.
Bill Shorten needs to pause and reflect very carefully on the Royal Commission’s recommendations. A well-regulated mortgage broking industry is important to competition and helping to ensure that the consumers gets a good deal. He doesn’t want to hand the big banks a revenue bonanza.
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