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How fintech can help brokers navigate the regulatory environment

by Jon Shaw6 minute read

Mortgage brokers are caught between two worlds: they’re not strictly salespeople but they’re paid by commission; they’re not financial planners but they advise Australians on their biggest purchase.

Potential new regulations aimed at overhauling remuneration and increasing transparency are bringing the two closer together — but not without some uncertainty and pain.

Regulatory fintech (more commonly known as regtech) has a key role to play in solving those problems and more. Regtech can allow mortgage brokers to boost their productivity with straight-through processing that includes automated analysis of a client’s true financial position.

It can also power cross-selling of products — such as house and contents insurance or life and TPD, or related services such as full financial planning — as the wealth sector and mortgage sector become increasingly intertwined.

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It’s a natural evolution given that residential property is the most valuable asset most people ever own, even at retirement.

Using technology to future-proof against regulatory change

The regulator’s ongoing concerns about the quality of financial advice and consumers’ reluctance to pay high upfront fees suggest that reforms have missed the mark so far.

But regulatory change is coming to the mortgage broking sector. The big questions are what form they will take, and what impact they will have on the industry and consumers.

ASIC has already flagged its concerns and outlined more stringent expectations after a thorough review of the sector. The standard commission model is under threat, as are bonus commissions, bonus payments, and soft dollar benefits, because the regulator believes that they encourage poor consumer outcomes.

Others, such as the Sedgwick review, have gone further, recommending banks to cut volume-based incentives, non-transparent soft dollar payments and other incentives.

The most effective way to counter these changes over the long term is to prove better consumer outcomes, well ahead of ASIC conducting its own shadow shopping exercise.

Brokers already use technology to understand a client’s financial position and goals, calculate borrowing power, find the right loan, work out repayments, and manage the approval process with the lender including paperwork.

Fintech can further automate many of these processes and provide stronger audit trails. Bringing real data and analysis into the mortgage broking process supports the push towards more responsible lending practices. These stronger processes can improve consumer outcomes, such as reducing defaults, which can lead to broker penalties through clawback fees.

The risk of clawbacks hasn’t been a major issue in recent times, as official interest rates have declined to record lows and Sydney and Melbourne property prices have climbed.

Clawbacks due to default declined between 2012 and 2015, although in 2012 three lenders suspended trailing commissions across more than 4 per cent of their home loans (by value) because of default.

But when interest rates eventually begin climbing, poor lending practices stand to be exposed. That could result in even more excessive regulations, as we saw in the financial planning industry.

Investor loans make up the largest proportion of the mortgage broker market, but the sector is being squeezed by a regulator-led tightening of lending criteria and higher interest rates. Technology offers the double benefit of improving the client service offering, while also demonstrating a more robust process for evaluating borrowers’ financial capacity.

Technology underpins trust between mortgage brokers and customers

Customers recognise that mortgage brokers can deliver the loan they need. More than half of all new loans are now delivered via broking channels rather than lenders for a reason.

Trust and transparency are central to that relationship. The current scrutiny of the sector risks undermining these values. Smart mortgage brokers will use technology to improve the way they do business and build client confidence, whether those regulatory concerns are warranted or not.

This shift is currently occurring across financial planning. Automation offered by the fledgling robo-advice sector was initially seen as a threat, but that same technology is now being incorporated into planning software, boosting productivity and improving the quality of advice.

Mortgage broking, like financial advice, remains a relationship business. Technology can strengthen those relationships, rather than threaten them, and also help brokers improve governance and compliance before the wave of regulation arrives.

johnshaw x

Jon Shaw

AUTHOR

Jon Shaw is head of operations and technology at Moneysoft, which offers Cashflow as a service to financial professionals.

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