A slew of inquiries in the past few years have seen broking come under the microscope, but what the ongoing inquiries and royal commission have focused on is testimony from the lender and aggregator heads. Wanting to get what the industry really thinks, The Adviser asked brokers what they make of it all.
Those of you that read The Adviser’s online edition on 16 August 2012 would have come across a headline that read “Low doc ‘scandal’ sparks political storm”, a news story in which a minor political party called for a probe into Australia’s sub-prime mortgage market.
“We have often praised ourselves for having a stable banking system, when in reality we have been hiding our own sub-prime scandal,” Australian Democrats spokesperson David Collyer said at the time.
“This has left us terribly exposed and we need a royal commission to find out how deep the problem runs. We need to know the size and scale of the problem so that we can fix it and put the appropriate measures in place to make sure this never happens again.”
And here we are, with the requested royal commission, almost six years later. While low doc loans are not the issue at hand, mortgage lending has become a significant feature of the commission’s work to date.
Extensive media coverage of the royal commission is bittersweet: on one hand, it gives Australians evidence of just how deceitful the banks can be; on the other hand, it paints a very nasty image of anyone associated with financial services.
Brokers will naturally be looking to distance themselves from a lot of the bad press coming out of the inquiry, which, fortunately, has primarily focused on bankers and financial planners. But brokers have also been pulled under the spotlight.
Loan Market executive chairman Sam White said: “What started as a royal commission into banks has dramatically shifted to the broking industry — an industry that, as you know, is made up of over 10,000 small businesses across Australia.
“What’s disappointing is that the reputation of the industry has taken a beating.”
There are now potential changes on the horizon for the third-party channel. Changes that the Productivity Commission and the royal commission have been considering include:
How should brokers be paid?
Somewhere between FOFA and the ASIC review into broker remuneration, the term “commission” became a dirty word; getting paid by the product provider has increasingly been portrayed as a conflict of interest, a dodgy practice, something to be eradicated.
But according to Wealth & Wise broker, planner and executive chairman Scott Heathwood, commission-driven selling is actually the high-water mark for disclosure.
“It creates clarity, it creates choice, it encourages the customer to seek other opinions, but most importantly, it divides the sector into component parts and creates the opportunity for the truly independent professionals to emerge on their terms,” Mr Heathwood said.
“Trail and upfront commissions are not the enemy. They are paid from the manufacturer, form part of their marketing and business acquisition budget, do not increase the cost to the buyer, are fully disclosed to the customer, lower fees to clients and underwrite a competitive marketplace from which we know all innovation is derived.
“The time for commission to make a comeback is now; the internet has never made the market more transparent.”
One of the more frustrating things about the royal commission (and the Productivity Commission) is its propensity to cover old ground.
ASIC conducted its own extensive research into the mortgage broking industry and gave commissions, both upfront and trail, the stamp of approval (albeit with a suggestion to make some minor tweaks to the former).
“The broking industry has had multiple reviews into this exact topic, capped off by the royal commission” – Jonathan Harris
For the Productivity Commission to then release a sequel — a draft thesis protracted over 600 pages — questioning whether the current broker remuneration structure is appropriate, seems like a bit of an overindulgence. But then again, these inquiries do like to indulge themselves at the expense of the taxpayer, not to mention the hardworking brokers who help more than half of the nation’s home buyers.
“The broking industry has had multiple reviews into this exact topic, capped off by the royal commission,” Sydney-based broker Jonathan Harris said.
“The previous findings were that the status quo model was effectively not broken as a whole but needed some subtle tweaks, not wholesale change.
“I agree completely with the current amendments, which some lenders are adopting, regarding the upfront payments being net of offset. This is a common-sense approach and removes any assertion that a broker can inflate a loan for self-purpose and financially benefit from it.
“I think there are a very small number of brokers who have done this.”
Apparently, if he were a broker, former ASIC chairman Greg Medcraft would have been one of them.
Who can forget that Reuters event back in September last year where he remarked: “The mortgage broker commission is based on [the fact that] the larger their loans, the more you get. So, logically, what would you do? It’s human behaviour. I’d do it.”
It was a shocking statement to all who heard it. Especially brokers. After all, this is the person who was charged with keeping the sector regulated and in line.
Who is representing the industry?
To date, the only cohesive voice for Australian mortgage brokers has been the MFAA and FBAA. The Combined Industry Forum (CIF) has also been working diligently to secure the future of the third-party channel.
But is enough being done? Is the value that good brokers provide really being seen by those, like Hayne, who will ultimately decide the fate of the industry?
Corporate Financial Services founder and managing director Richard Gorman doesn’t think so. The 30-year broking veteran has penned his own submission to the royal commission.
“Yes, the MFAA have been a voice, but I don’t believe they have been an adequate voice,” Mr Gorman said.
“I don’t think they have defined the role of the good-quality broker in the manner that they should have. They are meant to represent organisations like ours that do very substantial, integrated work on a national basis.
“The reality is that good brokerages bring capacity to the table, they bring the client’s best interests to the table and none of the really good operational brokers put themselves ahead of their clients.”
Mr Gorman believes that good brokers who have strong relationships with their clients operate more like consultants than mortgage salespersons — something that is yet to be made clear to any of the inquiries we have seen so far.
“‘Broker’ is just a definitive term,” Mr Gorman said. “Those that really do operate in a relationship-based arrangement with their clients are more consultants than brokers; that’s fundamental to the way they look after their clients and the quality of their deals.”
Others have watched the events of the royal commission unfold and taken proactive steps to ensure the broking industry is being seen for what it truly is, rather than how the banks in the witness box frame it, or what the mainstream media decides it should be.
Loan Market executive chairman Sam White recently suggested a number of reforms, which he said are “rooted in a desire to do better by our customers and increase competition, not to appease the agenda of the big four”. These include standardising broker commissions and clawback policies and setting a common benchmark for income and expenditure assessment.
“Just like we did after the global financial crisis (GFC), our industry is entering a new phase of change,” Mr White said.
“As an industry, we continue to work with the customer at the heart of everything we do. But we can’t rest on our laurels — the industry must evolve.”
He added: “No doubt there will be some in the industry that think we should not change at all. I think it is a mistake for us to defend the status quo and resist calls to improve for our customers.
“What we have learnt from the financial planning industry is that if we don’t proactively take steps to change, then we will have change mandated for us. That change would be mandated by people who don’t understand how our industry works.”
James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.
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