Business leaders boardroom series 2013

A phone study by Galaxy Research found that as many as 2.7 million Australians have deliberately falsified details on their credit applications by either exaggerating or underestimating figures.

Since that time, however, the National Consumer Credit Protection Act (NCCP) has been introduced. The legislation has not only made fraudulent practices less common in the mortgage profession, but helped to rid the industry of unprofessional and part-time brokers.

Of course, even with NCCP, there will always be instances of fraud in the industry.

Last month, former mortgage broker, Moustafa Dandachli, appeared in Sydney’s Downing Centre Local Court charged with 10 offences relating to false loan applications. According to a statement from the Australian Securities and Investments Commission (ASIC), the applications occurred over six months and related to home loans totalling almost $3.8 million.

ANZ’s head of third party relationships channel Keiran Evans says it is the actions of individual fraudulent brokers that can impact the reputation of the industry: “when there is a ‘one-off’ example of fraud, it reflects badly on the whole industry,” he says.

“While I am happy to say we are seeing considerably less fraud today than we have ever seen, the fact is it is still out there and we need to be vigilant. Sometimes, brokers will conduct fraudulent practices without even knowing it.

“Borrowers may tell you that they have been employed long term, or they only have one credit card, when in fact they have two. Often, brokers won’t question this and they will fall victim to accidental fraud.

“As such, it is so important to hold seminars like this to show brokers what questions they should be asking their clients during the interview process and how they can verify whether the information provided to them is correct.

“The main reason we developed these webisodes in alliance with The Adviser, was to help provide brokers with the tools you need to run a growing and profitable business, and we are determined to provide you with the tools and knowledge that are relevant to your business.”

In this third instalment of the 2013 series – available as a webisode at www. theadviser.com.au/anz-workshops – brokers will be given the tools they need to ensure they meet all of their obligations under the NCCP and remain compliant every step of the way.

STAYING COMPLIANT

With compliance now an essential part of a broker’s role, what do they have to do to ensure they remain above board?

THE INTRODUCTION of the National Consumer Credit Protection Act (NCCP) brought with it several key changes.

While a majority of brokers have always gone to great lengths to ensure everything they do is in the best interest of their clients, the NCCP forced brokers to take their processes one step further.

Evidence of fact find, including preliminary client interviews, must now be recorded for NCCP purposes.

Well documented processes and proceedures can help brokers remain compliant and maintain consistent practices. In addition, they have to prove they have taken reasonable steps to place their clients with a “not unsuitable” product.

This has, understandably, added to a broker’s workload.

According to The Adviser’s latest industry-wide NCCP survey, more than one in three brokers is working an additional five hours every week to meet the new compliance requirements.

Moreover, an incredible 73.6 per cent of the 441 brokers surveyed said NCCP had increased their workload “substantially”.

Leigh Turner from Leigh Turner Financial Solutions is one broker who has found it tough adjusting to the additional workload under NCCP.

“The biggest issue with NCCP has been the additional time – everything takes a lot longer than it used to,” he says.

“But while writing loans is now more time consuming, I do understand that the legislation is in the best interests of everyone. It helps protect us and our clients.”

Indeed, while brokers are doing more work under the new legislation, NCCP has definitely helped rid the industry of some of its more unprofessional and ‘part-time’ players.

Today, only brokers truly dedicated to their craft and passionate about helping people remain.

Unprofessional or part-time players have begun to leave the industry, either of their own accord, or at the hands of the Mortgage & Finance Association of Australia (MFAA) and the Australian Securities and Investments Commission (ASIC).

Since the commencement of NCCP, ASIC has banned six persons from engaging in credit activities for practising fraudulent conduct, and the regulator currently has 18 other investigations underway.

In addition, ASIC has filed more than 120 credit matters for formal investigation since licensing was introduced.

“ASIC is particularly concerned with instances where persons have engaged in fraud or other misconduct relating to information provided in loan applications,” ASIC deputy chairman Peter Kell says.

“While ASIC regularly undertakes compliance reviews and publishes reports and guidance on compliance risks and good practice, we will not hesitate to take action where we encounter deliberate breaches, serious misconduct or significant risk of consumer detriment.”

ACCIDENTAL FRAUD

While ASIC has made it very clear it will take a hard-line approach with brokers found to be non-compliant or fraudulent, Gadens’ Jon Denovan is quick to point out that a majority of fraud cases occur as a result of carelessness on the part of the borrower or the broker.

Gadens’ research shows the top five documents that most commonly contain falsified information are tax returns, bank deposit information, security valuations, employment verification and loan applications.

ANZ’s assurance and compliance manager Grace Thiongo- Kinuthia says it is the responsibility of the broker to check all loan documentation before submitting it to a lender.

“You must make sure that everything is above board before proceeding to settlement,” she says. “If something doesn’t feel right or look right, it probably isn’t.

“The key is to ask as many questions as possible. If the client stumbles over an answer, alarm bells should ring.

“If the loan proceeds to settlement and then one year down the track the client can no longer afford their loan repayments, the onus will fall on the broker.

“As a broker, there is a lot at stake if an application turns out to be fraudulent. You could potentially lose your licence and respect in the industry.”

Ms Thiongo-Kinuthia encourages brokers to create their own ‘compliance fact-find’ and client needs analysis.

“If you integrate compliance into your processes, it will become much easier,” she says.

Able Finance’s Darin Yacopetti says he created his own hybrid document that combines the fact-find and CNA.

According to Mr Yacopetti, the one form makes the interview process a lot easier and ensures that he and his team meet all of their compliance requirements.

“Regulation can be as clear as mud, so I created a form that was approved by my aggregator. By using this form, I know that I am compliant and that all of my clients are receiving the exact same service,” he says.

In addition to using his hybrid fact-find form, Mr Yacopetti says he gets his aggregator to come into his office for a site visit every quarter to do a compliance check in the same way that ASIC would.

“Every time they come through our offices, they make suggestions, which we take on board. We want to ensure we are compliant every step of the way because it is in the best interest of our clients as well as us,” he says.

BAD APPLES

Mortgage & Finance Services’ Lisa Corlett is another broker who readily integrates compliance into her everyday processes.

When NCCP came into play, she made sure to tick every box and dot every ‘i’, which has helped her to identify a few “potentially” fraudulent loan applications.

In one instance, Ms Corlett says she had a repeat borrower who wanted a top-up on his loan.

“When we went to conduct the first interview, the client told us his wife was busy doing something with the kids, so she wouldn’t be there for the interview,” she recalls.

“This is quite normal, so alarm bells didn’t ring at first. However, as part of our compliance, we must speak to all of the loan applicants before progressing with finance.

“When we called the wife, she had no idea about a mortgage top-up. Because of this, we did not progress with the loan.

“This was a really interesting case because we thought we knew this client quite well, as we had helped them out before. It just goes to show, you can never be too careful.”

ANZ’s head of third party relationships channel Keiran Evans agrees, and says that because the concept of fraud is so far-reaching and broad, brokers must ensure they have robust processes in place that can help them identify potentially fraudulent practices at every step of the journey.

“Wherever there is money, there is opportunity for fraud. At ANZ, we have come across all sorts of fraudulent activity,” he says.

“In most instances, fraudulent people are professional. We have seen some authentic looking fraudulent bank statements.

“We have also seen instances where clients forget to mention they have motor vehicle finance, or brokers leave this off the documentation altogether because they want to help their client.

“At the end of the day, if they can’t afford a loan, they can’t afford a loan. Falsifying information and overlooking certain information is fraught with danger,” he says.

MEDIA COMPLIANCE

But it isn’t just fraudulent borrowers brokers should be wary.

As Ms Thiongo-Kinuthia explains, brokers can find themselves to be non-compliant in a variety of ways.

“Most brokers think if they avoid fraudulent borrowers and play by the rule book when it comes to submitting a loan, they will always be compliant. But this is not necessarily the case,” she says.

Some brokers can find themselves non-compliant by not updating their newsletter subscription list or monitoring their Facebook page.

“Brokers need to make sure the information on their website is up to date,” she says. “If certain information is out of date, it can be seen to be misleading.

“Moreover, brokers need to understand how important it is to manage their unsubscribe list. I know it is hard to manage sometimes, especially when you are really busy, but it is important to monitor and manage this.

“Finally, social media is sometimes a hazard. What most brokers don’t understand is that they are responsible for all the posts their followers or friends write on their wall.

“If something could be seen as misleading or non-compliant, remove it straight away.”

Evolution Loans’ Paul Hamilton says he monitors his Facebook and other social media pages quite closely.

“I use Facebook a lot, but I am always mindful about making advice-based comments. I would never tell someone now is a good time to fix or that we have reached the bottom of the property cycle, as these statements can be considered advice and render me non-compliant,” he says.

Instead, Mr Hamilton says he uses Facebook to alert his friends to any cash rate movements by the Reserve Bank, as well as any interesting market commentary.

“For me, I use Facebook to stay top of mind with my clients, without pestering them. I try to position myself as an expert in the industry. As such, I post statistics that I believe would be relevant and interesting to homeowners and potential buyers.”

Keiran Evans says it is now essential that brokers know what they can and cannot say to clients. If brokers don’t, they may find themselves engaging in activities that could be perceived as unconscionable conduct.

“It pays to make compliance part of your processes, rather than a standalone chore,” he says.

“Brokers who make all of their processes compliant – from what they write on Facebook to how they conduct their fact-finds – will find their businesses benefit as a direct result.”

EGO OUT, HEART IN

Andrew Denton is one of Australia’s most respected television personalities and says that if you want to be successful, you have to work harder than the next guy

ANDREW DENTON’S son once saw then-Prime Minister John Howard speaking on television and said ‘Look, Daddy, there’s you’. As such, Mr Denton now refers to Mr Howard as “the tallest, most handsome, sexiest man in Australia”.

For most Australian television viewers and radio-listeners, however, Mr Denton is not easily confused with John Howard, and is an instantly recognisable media figure.

He has hosted the Logies (an interesting move given that he says he’s “not a great lover” of Australia’s television awards night), been on breakfast radio and interviewed countless celebrities, politicians and everyday heroes on his Enough Rope television program.

“I did have an extraordinary range of people on the show over six years,” he says. “Some of them changed the world and others had change forced upon them.”

Mr Denton says that despite the vast range of people who appeared on his program, successful people all have one thing in common: “They work harder than the next guy – it’s as simple as that.”

SEEKING CHANGE

In addition to their approach to hard work, people’s different responses to change can separate those who succeed from those who struggle.

“Often change doesn’t just happen,” he says. “You have to make it happen.

“Seeking and embracing change has been central to my career. Probably the most significant career decision I ever made in my life was back in 2001 when I quit my job.

“I was having a wonderful time making jokes about Big Brother contestants with one of my dearest friends, the fabulous Amanda Keller. However, after more than five years, I had this gnawing feeling that I wanted to do something of more substance, but I didn’t know what it was.”

So Mr Denton quit his breakfast radio job, with no idea what he was going to do next.

“I quit and I went home and I gave myself permission to do nothing,” he says. “That’s not as easy as it may sound. We all have a work ethic and believe it or not, I have an ego. Relevance deprivation syndrome set in.

“I used to have to force myself and remind myself that a day where I just read a book, did some cooking, went and kicked a footy with my son, hung about, was a good day.”

Despite the difficulties of ‘doing nothing’, it was an important factor in what came next. Over the six months he took off, his brain was ‘replenishing and rejuvenating’.

It was during this time that he noticed something was missing.

“This was the time of Big Brother and the world of reality television. What I saw was missing was anywhere on television where there was an actual conversation about the things that really mattered to us once we stopped gossiping about who was on Big Brother – our kids, our families, death, work, career, how to get through life.

The big things and the simple things.”

He set himself a challenge to create an interview show “based not just on celebrities, but on ideas and passions”. The idea was to have “egos out, brains and hearts in”.

The show, he says, would “stand clearly apart from the news and current affairs agenda of the week”. It “absolutely would not be a platform for anyone’s latest book, movie or CD”.

In listing what he wanted from the show, he said it “will not be afraid to be funny, and will not be afraid not to”. Ideally, it would “challenge people to think and then challenge their thinking”.

All this – and it had to be entertaining at the same time.

This became the blueprint for Enough Rope – a show which ended up running for over five years on the ABC.

“That would never have happened if I hadn’t decided to seek change,” he says.

“Often when you try something new, you don’t know what you’re doing... but there are so many people in the world who ‘should have’, ‘could have’, ‘one day I’m going to get there’ – but it’s like the ad says – if you want to make something happen: just do it.”

If you want to change things, you have to be prepared to take risks, he says, adding that the bravest people put everything on the line and risk failure to achieve success.

According to Mr Denton, if you’re too scared of failure, you will freeze and the things that you really want to happen will never eventuate.

“In truth, nobody wants to fail, but if you’re not intimidated by the prospect and you’re not afraid to try things, it’s those people – the ones who put themselves out there, who put themselves in harm’s way – who end up getting the reward and the immense satisfaction at having dared and won.”

RULES OF LIFE

Given the sheer amount of people Mr Denton has interviewed in his media career, it is no surprise that many of his stories, anecdotes and ‘life lessons’ are told through the lens of other people’s experiences.

He says that one of his favourite interviews during his time as host of Enough Rope was Jerry Seinfeld, who he describes as “the smartest man in world comedy”.

Mr Seinfeld’s ‘three rules of life’, which he detailed on the program, are something which all people could learn from, according to Mr Denton.

“I just sat down with a pad and paper and I thought – ‘Well, what are my three rules of life?’” Mr Seinfeld said in his interview with Mr Denton in 2007.

“And I came up with bust your arse, pay attention and fall in love.

“Bust your arse is just, basically, whatever you do: kill yourself – work as hard as you can, only good can come of it.

“Pay attention is just, people just don’t notice enough about what’s going on around them. You can absorb and learn from everything around you all the time.

“And fall in love isn’t really a romantic love... [it’s more like] if I get a really good cup of coffee, I like to go: ‘You know what, just hang on a second. This is a fantastic cup of coffee. Isn’t this great?’ And I’ll ask everyone ‘Isn’t this great coffee? ‘Cos you know, it’s not always great. This one is great’.”

Mr Denton echoes Mr Seinfeld’s sentiments and says if people really do want to succeed and be leaders in facing change, then they really do need to bust their arse, pay attention and fall in love.

THE ROAD AHEAD

Genworth, along with The Adviser, gathered Australia’s aggregation heads together to hear their perspectives on the market and on what the future holds for the third party distribution channel

THE ADVISER: First home buyer (FHB) activity has diminished significantly recently, much of which can be attributed to the First Home Owner Grant (FHOG) being removed in several states. Genworth’s latest Streets Ahead report shows FHBs have suffered the biggest fall in confidence of late, with the overall FHB Index falling by 12.8 per cent, from 98.5 to 85.9. But with interest rates low and home values stagnating, do you expect to see FHBs return to the market?

BRIDGET SAKR: That’s right, we have seen confidence drop. People have been deleveraging, but now with interest rates reducing, it feels like all homebuyers are willing to get back into the market. Overall, volumes are on the rise, but this is largely attributed to a growing appetite for investment loans and refinancing.

MICHAEL RUSSELL: We need to show caution when reviewing what’s being reported around FHBs. While the Australian Bureau of Statistics (ABS) reports a collapse in the FHB market, this needs to be put into perspective.
Ever since state governments began removing FHOGs on established dwellings, ABS has not been reporting the true number of FHBs entering the market.

Today, a first home buyer is only identified as a first home buyer if they are applying for the FHOG.

Consequently, when FHBs purchase established dwellings without the grant, they will not be recorded as FHBs by the ABS. As a result, the ABS has been understating the number of FHBs for some time. That said, there are plenty of compelling reasons why FHBs should be considering entering the market at this time.

THE ADVISER: If FHBs are re-entering the market at a solid rate, this can only be a good thing for the third party distribution channel, with data from Genworth’s latest Streets Ahead report showing 32 per cent of prospective FHBs intend to apply via a broker, as opposed to 26 per cent of prospective investors, who are much more likely to apply over the internet. Does this represent an opportunity for brokers to introduce a segment-specific channel strategy?

GERALD FOLEY: Different brokers will target different demographics. Some brokers are doing more in the self-managed super fund space, while others specialise in the investor market.

You will always have brokers who prefer to deal with certain borrower types. That said, I can honestly say that none of the borrowing types are doing a lot at the moment. I think people are sitting on their hands, waiting for the election to pass.

Admittedly, some people are still happy to transact and buy, given that the election is still [some time] away, but others are a little more cautious.

Once the election has passed, I truly expect the property market to pick up and I expect brokers to enjoy a cracking end to the year.

Further to that, I think property conditions will continue to improve over the coming two years. Whether or not we will see home values increase is completely separate, but I do believe borrowers will make the most of the low interest rate environment and jump back onto the property ladder.

SAM WHITE: I agree, and at Loan Market we are starting to see a little bit of that already. We are seeing more and more potential borrowers entering the market, keen to take advantage of the low interest rates environment.

We are in the unique position of being associated with a real estate franchise, so we also get a good idea of what the property market is doing generally. And, by all accounts, the market is pretty robust in some states.

NSW is solid, Western Australian is booming and Queensland is getting better.

On the other hand, Victoria is still quite soft and South Australia has plateaued.

MICHAEL RUSSELL: With all respect, I don’t necessarily agree. It is always a risk when we allow our own business growth to distort our view on what’s really occurring in the broader market.

Irrespective of our own business peaks and troughs, housing credit growth sits at circa five per cent, with a subdued outlook for at least the next couple of years. Consumer confidence is waning, job growth remains under pressure and economic growth forecasts have now been dialled down to less than three per cent. As a result, we’ll continue to operate in a benign environment for the immediate future and need to be careful not to talk up the property market to a great extent.

THE ADVISER: Michael Russell’s view that we are looking at restricted mortgage volumes and credit growth for the foreseeable future is supported by data from Genworth, which shows consumer confidence has fallen to its lowest level since the global financial crisis. The Genworth Homebuyer Index dropped by 5 per cent, from 98.4 to 93.4 – the index’s lowest level since 2008. The research indicates that this drop in confidence can be attributed to increases in mortgage stress, driven by over commitment and concerns about unemployment.

With this in mind, what can brokers do to help grow their business and their bottom line?

MICHAEL RUSSELL: There is no doubt brokers must diversify into complementary services such as risk insurance, mortgage protection and, if appropriate, financial planning.

Mortgage Choice launched a new financial planning franchise business last year to enhance our customer proposition and look to build increased revenue opportunities and brand value.

We elected a ground up build and it is great to see the business already outperforming our business model across many of the key customer acquisition and conversion metrics.

At the end of the day, different businesses will choose different ways to embrace diversification.

JOHN KOLENDA: Diversification is something all aggregators speak about and encourage brokers to do, but there are still a lot of brokers who do not wish to diversify.

The question for us is: How do we make it easy for brokers? If they don’t want to diversify now, how can we make it easy for them to transition in the future?

From my perspective, I believe brokers are hesitant to diversify because they don’t understand the basics. They don’t know how to cross sell to their clients. They don’t know how to integrate other services into their conversations.

The opportunity is there, but they need to be shown how to do it, especially in the area of self-managed super funds because it is so easy to be non-compliant in this space.

GERALD FOLEY: I agree. We are finding more and more of our brokers are embracing or wishing to embrace SMSF lending.

We tell them that the more they do it, the easier it will be. That said, if they are only writing one SMSF property loan a year, it is fair to say they might not be up to date with what is happening in that market.

BRIDGET SAKR: In our latest Streets Ahead report (the new edition is due out next month), we saw the SMSF lending space is definitely an area that is growing and this does represent a good opportunity for brokers.

We are seeing more and more brokers playing in this space, but they do need to make sure they are well equipped to write these loans before they do so.

SAM WHITE: We are seeing more brokers buying rent rolls and integrating their data with real estate agents so that they can share the same culture, processes and structure.

CHRIS SLATER: We are definitely seeing a lot more brokers embracing various forms of diversification, and we do whatever we can to help them cross sell effectively and successfully.

We have invested a lot in our software platforms and training programs to make writing mortgages just that bit easier and faster for our brokers. Doing this frees up their time to meet more clients and offer more services to every customer they deal with.

MICHAEL RUSSELL: Everyone is looking to diversify; it is just that some do it better than others. For me, integration or some sort of shared ownership is crucial. The fact is, most referral arrangements start off like a hot bath – they go cold pretty quickly.

JOHN KOLENDA: I agree 100 per cent – the closer the relationship, the better the referral. Of all the models you have, the best operating model is full integration.

VAUGHN FOWLER: At Aussie, we have launched a few new products in recent months. However, we have always struggled to get our guys engaged in non-mortgage sales. There is a formula to it that we simply haven’t cracked. I believe there are a couple of reasons they are hesitant to sell additional products.

The first and most obvious reason is that they are simply too busy writing mortgages and it is hard to get them motivated to sell other products for the sake of $100. The other reason is that our product offering in the past probably wasn’t up to scratch. As such, we are currently in the process of revamping all of our products in the hope that our brokers will jump on board this time.

JOHN KOLENDA: Overall, I don’t think too many brokers truly diversify. That said, the current market has forced brokers to do more with less. As such, we are starting to see the small percentage who do diversify enhance their offering.

As the industry matures and evolves, I think we will see the number of businesses diversifying starting to swell. I think the market is not out of the woods yet and I think brokers will have to look at how they can do more with less. Hopefully, the election will be a turning point. I don’t think the market will run away, but hopefully market share will start to increase. Broker market share is already increasing and I think through further integration, this will increase further.

THE ADVISER: Mr Kolenda is right. When broker commissions were cut, it forced the third party distribution channel to start looking at other avenues. The reduction in broker commissions has also given aggregators less money to spend on broker support. Has this affected broker productivity as a result?

VAUGHN FOWLER: Absolutely not. We have increased our broker spending over the years. We have increased our resources significantly. As a result, we have seen an increase in franchise numbers. At the end of the day, broker productivity is less affected by commissions than it is by the size of the loan book. That is to say, the bigger the loan book, the less business the broker writes.
If you look back at the historical data, the bigger the broker became, the less they wrote in new business.

While there are some exceptions, a majority of brokers with a big loan book lose the urge to source new business.

That said, I think we are seeing less and less of this these days. Brokers who are in the industry are here because they are passionate about helping people achieve their dream of homeownership.

NCCP has got rid of a lot of the lazy, part-time brokers and we are left with an industry that is strong, passionate and dedicated to their craft.

BRENDAN WRIGHT: At FAST, we too have increased the level of support we offer brokers. Over the last 12 months, we have invested heavily in our software platform to make writing loans easier for our brokers.
We will do whatever we can to enhance the experience of our brokers.

I am also seeing a lot more lenders invest in the broker channel. CBA has successfully launched their Kaizen program and we are encouraging our brokers to take part in it. It is a good course that ultimately teaches them how to be more productive in business.

MICHAEL RUSSELL: Productivity is certainly key in a post-GFC world. The global financial crisis (GFC) did a lot more than force down broker commissions. There were four things that occurred with the onset of the GFC that changed the paradigm of mortgage borrowing forever.

We had commission cuts, double digit to low single digit housing credit growth, a significant reduction in loan sizes and the propensity of mortgage holders to move from a gearing to a deleveraging position. That has been stamped on Gen X and Gen Y – they don’t want to leverage like their parents did.

BRIDGET SAKR: I agree. I think it will be interesting to see the results of Genworth’s next Streets Ahead report, and whether that will show brokers are becoming even more important in the homebuying process.

THE ADVISER: Our data shows us that white labelling has really made its mark over the past few years. What are the opportunities for brokers in the white labelling sector?

CHRIS SLATER: I have seen a surprisingly big uptake in white label products over the last 12 months. We are seeing a growing volume in this space. This is down to a few things.

Firstly, as John mentioned, brokers are being forced to do more with less. As such, they need their client experience to be second to none, and by selling white label solutions they know what service they will get and how quickly a loan can be processed.

If you put a product in front of a customer that can be turned around quickly, then that is great.

At AFG, we believe there is not enough competition in the industry. We basically have four lenders writing the lion’s share of the mortgages. Our view is that white label is good because it brings competition back into the space. Is it the next frontier for us? No, but we do think it is a ‘must have’.

BRENDAN WRIGHT: I agree that white labelling is good for brokers as it offers them and their clients more choice and, after all, that is what the broker proposition is based on.

I do believe we need to see more competition in the market. There is a place for credit unions and non-bank lenders – I think they will make a return to form. They have the opportunity to create competition and pick niches in the marketplace because they are small and nimble. From an aggregator’s perspective, they are essential to any panel.