The heads of two broking associations have hit out at the final report from the financial services royal commission, warning of the “damaging” impacts the recommendations could have on industry, competition and the consumer channel.
The final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry called for 76 recommendations to change the finance industry, including several relating to the broker channel.
Commissioner Kenneth Hayne called for the abolition of trail commissions in the broker market, the introduction of a best interests duty, and a move away from a lender-paid commission to a consumer-paid fee, among other recommendations.
Treasurer Josh Frydenberg said that the government would be implementing all the recommendations (in one form or another) but seems to have shied away from bringing in the consumer-pays model straight away.
While Commissioner Hayne called for a move away from a lender-paid commission to a consumer-paid fee, the government has been cognisant of the major ramifications this could have on industry.
Mr Frydenberg yesterday (4 February) therefore agreed to ban trail commissions next year but said that government should look at the feasibility of moving to a consumer-pays model in three years’ time.
The recommendations have been met with outcry and dismay from the broking industry.
Speaking to The Adviser following the release of the report, the managing director of the Finance Brokers Association of Australia (FBAA), Peter White, said that the royal commission has failed to understand the role of mortgage brokers and the competitiveness they bring to the market.
According to the head of the FBAA, Commissioner Hayne wants to “FOFA” the broking industry, which Mr White said he “completely disagreed with”.
“That will take competition out of the marketplace, brokers will leave the industry, there will be some 20,000 small businesses out of business which would ruin twice as many lives.”
Mr White said that the abolition of trail “could force up-front commissions to rise in order to compensate for reduced revenues to brokerages, which in turn will lift interest rates and make housing affordability more difficult,” he explained.
The head of the broker association told The Adviser: “I was very disappointed with the royal commission’s final report. It was a real lack of due diligence and understanding of not only our industry but various models that were touted.
“I don’t feel like they have done their research and it seems that they have taken, at face value, the comments that came out of the royal commission hearings without understanding the greater picture of the value proposition of brokers.”
Mr White also slammed the recommendation to eliminate up-front commissions but congratulated the government for not reacting to this.
“Commissioner Hayne wants to hand even more power to the big banks and eliminate competition, which is a ridiculous scenario and shows just how out of touch he is when it comes to brokers.
“If a user-pays model was implemented, we know that most borrowers wouldn’t pay, and banks would make more money and standards would drop further.
“It’s very disappointing that the royal commission wants to destroy some 20,000 small businesses for the monetary gain of the big banks, and we trust the government will see clearly on this and continue to work extensively with our industry to improve consumer outcomes,” he said.
He continued: “They have taken action on trail, there are unintended consequences and legal contracts in place for trail, which is a deferred establishment fee. So how is that going to be treated by the lenders? Is there going to be compensation paid? Are upfronts going to be increased to compensate for that? What does that look like? I don’t think government is fully across all that – though I could be wrong.
“These things are going to be need to be looked at within the industry because changing agreements also brings into play unfair contracts law, depending on how they do it. There has to be some sort of negotiation and conversation to look at this.”
Likewise, the CEO of the Mortgage & Finance Association of Australia, Mike Felton, said that the recommendations on mortgage brokers represent “a huge win” for the big four banks.
Mr Felton argued that destroying the viability of the mortgage broker channel would immediately reduce competition and drive customers back into the branches of the banks with the largest branch networks.
“These policy recommendations are effectively a new multi-thousand-dollar tax on borrowing,” he said.
“They will put the broker channel at severe risk, damaging competition and access to credit and entrench bank power.”
Noting that brokers are “critical to the health of Australia’s mortgage lending market,” he said that he failed to see how “how decimating the broker channel, leaving Australians with a handful of lenders to choose from, is good for competition, or good for customers”.
Noting recent Momentum Intelligence research into consumer attitudes regarding the payment of broker fees, Mr Felton said: “If the recommendation is a broker-only consumer fee-for-service, that will mean brokers and smaller lenders will no longer be able to compete on a level playing field with the big banks with major branch networks.
“We know from recent, independent research that 96.5 per cent of customers are not willing to make a payment to a broker of $2,000 and most are unwilling to pay anything at all.
“This sort of fee would see consumers deserting brokers, cutting access to smaller lenders and driving consumers into the branches of the major lenders. This will increase bank power, and make getting access to a home loan harder and more expensive for home buyers,” Mr Felton said.
The head of the MFAA added that the royal commission report looks at the Netherlands model of paying fees, but said that the royal commission “ignores key elements of the Netherlands model that are critical to understanding the way it works”.
Mr Felton elaborated: “A key aspect of this model relates to a customer’s ability to pay the fee. In the Netherlands, all interest on a home loan and costs relating to establishing a home loan are tax deductible, including the acquisition of advice relating to the loan. These can be deducted over the life of the loan.
“This, of course, would never happen here and can only add to the current affordability crisis for those already struggling to afford a home,” Mr Felton said.
He added that another key aspect of the Netherlands model that had “been ignored” was the ability for the banks to undercut the broker channel. As such, the only way this could work is if fees were of comparable size and not of a level that challenges viability for broker businesses, he argued.
“However, the commissioner has stated that this fee should be the equivalent of the banks’ cost of writing a home loan. In this case, the large lenders’ enormous economies of scale will mean their costs will be a lot lower than the marginal cost for a broker to arrange a suitable loan for a customer, which will therefore necessarily undercut the broker channel. Again, this brings great risk that consumers simply desert the broker channel, decimating competition and access to credit, which is a very poor outcome for consumers.”
Mr Felton concluded: “While the major lenders will be very happy about these recommendations, we fail to see how this is a good outcome for everyday Australians.
“Finally, while we disagree on the proposed abolition of trail commissions, we welcome the more measured approach being taken by the government. We look forward to working with the government, Treasury and opposition to work through these recommendations and to find solutions that represent good outcomes for consumers, not just for major lenders,” Mr Felton said.
Find out more about what the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry means for the broking industry, and what the next steps are, by attending the Better Business Summit 2019.
Running across five different states every Thursday from 14 February, the Better Business Summit provides brokers with straight-talking, practical advice to help them grow and improve their businesses in this time of change.
Tickets are selling out – so make sure you secure your ticket today to stay ahead of the curve and prepare your business.
[Related: Treasury: Trail to be banned next year]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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