While the royal commission continues its barrage of questions to lenders, one key question that the commission has failed to understand the answer to is: What does a broker do?
Here at The Adviser, we’ve been tracking the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry as each day brings with it new revelations and insights into the lending world.
While we generally applaud the manner in which Commissioner Hayne and the counsels assisting have been conducting the commission, there has been one aspect of credit that the commission still does not fully grasp: the role of the broker.
On Friday, for example, counsel assisting the commission Rowena Orr QC asked Westpac’s general manager of commercial and business banking whether third-party originators were accountable for the suitability of the loan after the initial loan application is submitted to the bank.
After clarifying that broker-originated loans are “limited to making the initial application or referral” or helping clients gather the relevant information needed for the loan, she asked: “After that package of documents is submitted, do they [brokers] have any further involvement in the loan approval process?”
Westpac’s Alastair Welsh responded: “They have no involvement in the loan approval process because that’s the banker’s accountability to write the submission.
“They may have involvement in providing information and be the conduit between the bank and also the client.”
Ms Orr continued: “So, who has the discussions with the customer about their needs and objectives, and [who] verifies the information and does the customer serviceability assessments?”
Mr Welsh replied: “The banker is accountable for having the conversation with the customers, having accountability for writing the credit submission and doing the serviceability [and] verifying the information.”
These questions may have been asked to understand Mr Welsh’s position on the role of the broker, or they could have been asked to help clarify the role for those listening to the commission.
But there is also the possibility that they have been asked because the commissioners (i.e. Ms Orr and Commissioner Hayne) do not know what a broker does. If that is the case, then that is truly worrying.
This is, after all, a royal commission into the banking, superannuation and financial services industry — and brokers write more than half of all home loans and form a major part of this industry.
But, is the commission confused with who is actually underwriting the loan? Does the royal commission think brokers have the power of approval?
The role of the broker and their obligations have been shifting for some time. When broking first started taking off in Australia in the 1980s, it was largely about providing choice outside of the major banks — it led to the rise of challenger banks and opened the door to home ownership for the many that fell outside of the vanilla loan.
While choice still plays a leading role in what a broker does, a modern-day broker does so much more than that. They know their customer. They often know their customer’s kids’ names, pets’ names and the birthdays of both, too.
They provide clarity in an incredibly stressful and sometimes complicated home buying process.
But more and more work is falling off the plate of the lenders and into the laps of brokers. A line needs to be drawn.
So, what does a broker do and who do they represent? A recent blog written by Jon Denovan, special counsel at Dentons, considered the question from a legal viewpoint and concluded that brokers represent borrowers, not lenders.
Legally, Mr Denovan says, brokers work principally for borrowers.
What a broker is not is an underwriter for the bank.
Brokers do not approve loans.
Brokers do not provide the borrower with money. That is the role of the banks.
But as the royal commission case studies have been showcasing, banks have become so large now that they are finding it hard to truly know their customers and are relying on brokers to undertake that check for them.
The personal touch of a broker is why brokers are the most popular channel of choice for mortgages. But the lending side of things — the actual underwriting of a loan — and the checks and balances involved in approving a loan need to still be undertaken by the bank. And that is what the royal commission needs to understand.