SPOTLIGHT -- Connective roundtable on licensing

With licensing just around the corner, regulation is the topic on everyone’s lips. At the annual Connective roundtable discussion in Sydney last month, some of the industry’s most influential members gathered to discuss everything from licensing to credit advice and responsible lending.

KEY

GL: Glenn Lees, principal Connective

DB: Dominic Bilby, ASIC

MH: Mark Haron principal Connective

PN: Phil Naylor, chief executive officer MFAA

BS: Bridget Sakr, sales leader Genworth Financial

LC: Lisa Claes, executive director mortgages ING DIRECT

DD: Daniel Di Conza, principal Acceptance Finance

WF: Will Foster, director Property Planning Australia

With licensing registration now open, many brokers are starting to give more thought as to whether they will take their own licence or work under their aggregators.

Connective has made their stance clear. It will require all its members to obtain their own licence.

GL: We decided it wasn’t a particularly onerous exercise for our brokers to set about obtaining their own Australian Credit Licence (ACL). The majority of brokers we work with already meet all the necessary compliance obligations, so it is not difficult for them to go that extra step and obtain their own licence.

We have now officially stipulated that any broker wishing to deal with Connective, needs to hold their own ACL. There are a couple of reasons as to why we took this stance on licensing.

First, Connective believes that brokers who hold their own licence are highlighting their dedication to the new regulation. Secondly, and perhaps most importantly, we did not want to be peering into our brokers’ businesses. And, if they hold their own licence, we effectively avoid having to do just that.

WF: We [Property Planning Australia] were always going to get our own license. At the end of the day we wanted to be in charge of our own destiny.

The devil is in the detail. Now that the registration process is complete, we don’t really know what the future will bring. No one really knows the specifics of the regulation just yet. That said, I do know that it is probably better to get a licence at the beginning, while ASIC is still unclear on all the regulations.

DD: We were always going to have our own license as well. I guess we are in a bit of the unique situation that we are currently under two aggregators at the moment and we could have chosen to become a credit representative under our other aggregator’s license.

But, I suspect we comply with most of the regulations already and falling under someone else’s license doesn’t really gel with me and my business model. I don’t want someone peering into my business and telling me how to run my company when I have been running it successfully for some time. I believe brokerages that have a bit of infrastructure will opt to become an Australian Credit Licence holder. I think it's terrific that Connective has taken this initiative on licensing. To have stakeholders representing all facets of the industry in the one room, and to hear firsthand their views, is invaluable.

LENDER PREFERENCE

Today, many lenders refuse to deal directly with smaller brokerages, instead opting to provide products through the company’s aggregator. With the implementation of licensing, lenders have stipulated that they will only deal with Australian Credit Licence holders. But with so many smaller brokerages opting to work under their own licence, rather than the licence of their aggregator, will lenders have to broaden their lending scope to include independent brokerages?

LC: From a consumer’s point of view, to know that a broker is licensed will give the profession more credibility. Customers can rest easy in the knowledge that they are being looked after by a regulated, licensed individual who has their best intentions at heart. As Daniel touched on before, I think it will be wise for some of the larger groups to get their own ACL, rather than fall under the aggregator’s licence, because it gives them that little bit more independence and helps add to the overall broker package.

From a lender’s perspective, we will not deal with a credit representative directly. We will only deal with those who have an ACL. If an aggregator was to fold, we would not be able to deal directly with the credit representatives that fell under its licence.

PN: 12 months ago, most aggregators preferred their brokers to obtain their own licence. However, the balance has since changed to favour the credit representative model. Today, many aggregators – especially the brand groups – are leaning towards the credit representative model.

Aggregators with a recognisable brand are responsible for maintaining their position in the market. As such many are of the opinion, that if they have to make sure the brand remains recognisable, they might as well take charge of their brokers’ licences as well.

Originally I thought there would be as many as 10,000 brokers applying for a credit license. Now I expect that number to be approximately halved.

Regardless of how many brokers register and which model they end up opting for, under the new regulation, all brokers must meet various ‘responsible lending’ obligations.

But even with ‘responsible lending’ obligations in place, how does a bank know if a broker is meeting their responsible lending requirements?

GL: If a broker goes to a customer’s house and is told by their client that it is just ‘them and the Mrs’ living there, yet the broker can see bikes up and down the driveway – what do they do?

While the broker has always been obliged to tell the truth to the lender, it will be interesting to see how the new regulation will deal with situations where the borrower is telling the broker one thing but the broker suspects this is not the case.

PN: I don’t think the ‘responsible lending’ obligations outlined in the new regulation vary too much from what a broker does already. They already have obligations to their bank and to their customer that they manage to meet successfully, and I can’t see that changing when regulation is finally introduced.

BS: Licensing and in turn responsible lending will serve to improve the industry. At the end of the day, it is going to help every lender, credit union, broker and mortgage insurer improve their credibility and business model. The more regulated the industry is, the less likely we are to see loan defaults. With brokers forced to adhere to responsible lending obligations, insurance companies such as Genworth should see fewer customers defaulting on loans on the back of poor credit advice.

Over the last 18 months, we have seen the profile of an investor change. Historically low interest rates teamed with low unemployment figures and strong consumer confidence meant younger Australians were stepping into the investment arena.

As such, performance on investor loans started to fall behind owner occupied housing loans. This is quite unusual because they usually perform in line with each other. Traditionally, a lot of investors are in the 40 and above age bracket. They had been in the home loan market before and knew what to expect. However, as younger borrowers started to enter the market with no equity, no savings and no idea about commitment, investor defaults increased.

As such, we were forced to introduce a policy where all investors had to prove they had 10 per cent of the loan in genuine savings.

From that point on, we started to see overall investor performance improve dramatically. That was the last policy change we made and I can’t think we will make any more in the immediate future. At this stage we are quite comfortable with the changes the lenders have made. A lot of lenders have changed their lending criteria so that it favours existing customers. I can understand why they have done this, and in many instances, I think it is a sound move on behalf of the banks. They know what to expect from the existing customers.

FEE FOR SERVICE

The large majority of the industry agrees that licensing will change the industry. Customers will want and require their licensed broker to provide them with sound credit advice, which could open the door to charging an advice fee – something the MFAA supports.

PN: Brokers will finally be able to bill themselves as ‘professionals’. Moreover, they will be distributing credit advice and as such, I think it is only fair that they charge a fee for their service. Other professionals that provide advice charge a fee, so why shouldn’t a broker?

The MFAA’s new professional framework will allow brokers to charge a fee, so long as they are charging a fee for a service that they are not already being remunerated for.

However, brokers that do implement a fee for service model, must make sure that they are completely transparent with their customers, and can explain to them what the fee is and what it is for.

Even ASIC is supporting the move towards advice. Once regulation is in play, brokers will be ‘professional credit advisers’ – providing credit advice to their customers.

DB: Actually, the ASIC regulatory Act does not use the word ‘advice’. While we have said brokers will be ‘credit advisers’, we have not said that they are qualified to give ‘advice’.