It has been another busy and eventful year for brokers, as well as the broader financial services industry, with the release of the final report from the banking royal commission, introduction of new bills and legislation, a federal election, and plenty of discussions around broker commissions. The Adviser looks back at the most significant events that had an impact on Australian mortgage brokers in 2019.
ING’s head of third party distribution, Glenn Gibson, describes 2019 as a tale of two halves. In the first half of 2019, brokers wondered if their businesses were viable amidst the regulatory upheaval and if they had to reinvent themselves to survive, given the royal commission’s recommendation for trail to be removed. However, in the second half, brokers believed they could continue to grow and drive the third-party space despite new and ongoing challenges.
Consumer confidence in the broker sector slumped in 2019, which, according to Mr Gibson, stemmed from the findings from the royal commission, uncertainty over what recommendations would be implemented, as well as policy changes by lenders.
“We saw consumer confidence drop across the industry, so the amount of transactions was less, auction clearance rates were less, the number of properties for sale were less,” Mr Gibson said.
“The first half of the year was certainly a challenge for our industry, but the industry has certainly been a lot more proactive in the second half about regaining consumer confidence.”
Royal commission and broker remuneration
Almost a year after the first round of the Royal Commission into Banking, Superannuation and Financial Services Industry commenced, commissioner Kenneth Hayne released his 1,000-page final report in three volumes. In it, he reiterated his concerns from his interim report regarding broker remuneration arrangements that might be conflicted, and warned lenders that paying value-based commissions to brokers may be breaching their obligations under the National Consumer Credit Protection (NCCP) Act. Commissioner Hayne therefore recommended that the commission should be paid for by the consumer as a fee for service. He recommended that changes in broker remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers for new loans, and then prohibiting lenders from paying other commissions to mortgage brokers.
The federal government, which initially agreed to implement all 76 recommendations in the banking royal commission report, said it would look to ban trail commissions in the broking industry for new loans from 1 July 2020, with a further review in three years on the impacts of removing upfront commissions and moving to a borrower-pays remuneration structure.
What followed was a concerted effort from broking industry groups to lobby the government against the removal of trail commissions. The CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, commented: “This was a year of intense scrutiny, one that required bold calls and strong positioning. For the MFAA, the main focus was on predicting the outcome of the royal commission, and then rapidly mobilising resources before it was announced.
“Our ‘Don’t Kill Competition’ campaign and related advocacy helped us defend against recommendations that would have impacted the viability of our industry.”
“Our positioning was supported by the great work of our members, and backed by incredibly strong data.”
Likewise, the Finance Brokers Association of Australia (FBAA), aggregators, brokers, lenders and fintech providers all pulled together to lobby on behalf of the broking industry. And it seemed to pay off; two months before the federal election, Treasurer Josh Frydenberg said in March the government will seek to review the impacts of removing trail in three years’ time rather than abolishing it in 2020.
Speaking to The Adviser, FBAA managing director Peter White said the cross-industry collaboration was the biggest theme that ran through 2019 – and one he hoped would continue into next year, too.
Mr White said: “The big thing that happened in 2019 was the collaboration between everybody. We all came together for all the right reasons and worked together to work through this. I think that actually sets a path and a journey for the future. The fact that we actually can sit down, work collaboratively on something where there is a significant piece of work that needs that alignment, is crucial and fairly unique, too.
“While we still have our independent voices (and I’m always going to speak my mind), where we can find that alignment and come together for the betterment of the industry, we should. So that is significant going forward and for 2020, because there will always be something [that this industry faces] that will require a united front.”
The Liberal-National Coalition party returned to government after clinching the lead on 18 May. The mortgage broking industry was a vocal supporter of the Coalition government, given its stance on broker remuneration. The election result meant that the review into the impacts of removing trail commissions as well as the feasibility of continuing upfront commissions would proceed, which will be undertaken by the Council of Financial Regulators and the Australian Competition and Consumer Commission (ACCC).
Best interests duty
The Morrison government introduced the NCCP Amendment (Mortgage Brokers) Bill 2019, which requires mortgage brokers to act in the best interests of consumers when providing credit assistance, as recommended in the banking royal commission report.
The bill and regulations make changes to mortgage broker remuneration by: requiring the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount, banning campaign and volume-based commissions and payments, and capping soft dollar benefits. Furthermore, the regulations limit the period over which commissions can be clawed back from aggregators and mortgage brokers to two years and prohibit the cost of clawbacks being passed on to consumers.
Entry into force of the reforms is scheduled for 1 July 2020.
The final bill (not yet released at the time of writing) is expected to outline a “principles-based standard of conduct” that brokers will need to adhere to in relation to credit assistance.
Many of the aggregator and association heads have backed a principles-based approach, with ING’s Mr Gibson highlighting that this would offer brokers some flexibility around how they operate.
“It’s a very difficult position because, with the Future of Financial Advice reforms, I saw them bring in a very specific requirement for best interests duty,” Mr Gibson said.
“It became so specific that it almost put a halt to business for six months. I actually like the principles-based model better.”
However, the Australian Securities and Investments Commission (ASIC) has said that it will launch guidance around the new best interests duty for brokers ahead of the commencement of the law next year – and consult with industry on this new guidance, too.
Richard McMahon, a senior manager in the credit, retail banking and payments division at ASIC, said in November: “We’re considering our guidance about what acting in someone’s best interests means, and that raises some really important, difficult questions.”
He suggested that these include: “What does ‘best’ mean to you? What if a product is not on your panel? Or you’re not accredited? Or it’s 91 days [to settlement]? And does ‘best’ mean ‘lowest cost’?”
Touching on the conundrum of being required to act in the best interests of their client while not being able to offer every single product from every single lender in the market [due to the sheer size of the mortgage market and the fact that aggregators do not have every lender on panel, nor do brokers necessarily have accreditation with every lender on that panel], Mr McMahon said it was “one of the key issues that [ASIC is] thinking about”.
Net of offset reforms
In October, the federal Treasurer revealed that the Morrison government had been taking into account industry responses to its recent consultation on the upcoming best interests duty for brokers, and will therefore move away from its previously announced 90-day cap when determining the maximum drawdown amount on which commissions can be paid on home loans.
According to Mr Frydenberg, stakeholder responses argued that the three-month calculation period for the net of offset payments as part of the broking reforms proposed in its NCCP Amendment (Mortgage Brokers) Bill 2019 “was too short”. As a result, this cap will be extended to a full 365 days.
This will “allow brokers to be more fairly remunerated for the funds that they arrange,” he said.
Mortgage pricing inquiry
Also in October, the federal government commissioned the ACCC to conduct a review into mortgage pricing, amid criticism of the banks from Mr Frydenberg for failure to pass on the RBA’s full cuts to the cash rates.
The ACCC is to investigate a wide range of issues: from the rates paid by new versus existing customers, how the cost of financing for banks has affected bank decisions on interest rates, and why RBA cuts aren’t always passed on in full.
In addition, the inquiry will consider what prevents more consumers from switching to cheaper home loans.
The ACCC is expected to produce a preliminary report by the end of March 2020, with a final report due 30 September 2020.
Looking forward, the MFAA CEO said the hard work undertaken this year “need[s] to continue to demonstrate we can responsibly manage conflicts”.
“This and the scrutiny that comes with systemic importance is best addressed by staying ahead of the curve. To do this, we must continue to self-regulate, raise standards and progress our journey from ‘industry’ to ‘profession’,” Mr Felton said.
Find out more about what the industry thinks the key themes will be in 2020 here.
What were the biggest changes in the broker sector in 2019?
Loan requirements have become more complex as a result of increased scrutiny, and the biggest change was the increased scrutiny of living expenses of our clients. We’ve always done a thorough job of checking our clients’ monthly spending habits, but we have to provide a lot more documentation now, with a lot more work on living expenses. We have to scrutinise expenses line by line, commenting on every one-off expense such as holidays or weddings. Rightly so that we should be looking in depth into living expenses, but it is very time consuming as we can spend two hours on living expenses for some applications. We have to go back to the clients many times to ask more questions and request more documentation. We get a lot more resistance from unhappy clients for having their living expenses scrutinised in such forensic detail.
How has this affected your business?
We’ve had to take on one extra member of staff to do this work, and it’s costing us an extra $40,000 a year, so when I say it’s a big expense, it’s a big expense. We’ve also had to adapt by taking on bank statements through online platform Easy Docs, which should provide us with some analysis and guidance to check what we’re seeing in bank statements. We then scrutinise the figures line by line to ensure every single transaction is accounted for and commented on in our broker notes. We’re now doing six months’ living expenses where we only used to do three.
What do you think of the net of offset reforms?
I don’t agree with it. We’ve never billed a client one more dollar than we’ve needed. We do sometimes get some money out for them when there have been some home improvements, but that money just gets used up. To me, it’s a lot of administration and a lot of trust in the banks to get it right as well, which obviously has a big impact on the broker, the small-business owner and on our cash flow. We’re all going to have different sums of offset on bank loans. I’ve got one client who works in an accounting firm and she got a bonus. We decided for her to buy an investment property, so I told her to close her savings account down and put the money into an offset and then keep the bonus. So, I got full clawback on all that money when actually I was doing the right thing by the client. So, we’re getting penalised for doing the right thing by the client, when we didn’t need to borrow the money that we drew down.
Do you think principles-based guidance for the best interests duty will help increase trust in the broker sector?
I’m all for cleaning up the industry, but I think it needs to be scrutinised at an individual brokerage level. I think aggregators should be monitoring brokers more closely and looking at the portfolio to see how that individual broker is doing. There’s a lot more analysis to be done at the brokerage level. The aggregators can see whether the broker is placing business with only four lenders or 15 lenders. The brokers who are only placing business with four lenders need to be questioned on their decisions. Dealing with the sector at the individual brokerage level will sort things out.
What else would you like to see happen to improve the way you work or run your business?
There seems to be inconsistency around the way brokers and banks approve a client’s home loan. I’d like to see how another broker or bank was able to get a loan approved because that will help me learn why we couldn’t do it in our calculators. I would also get the files examined because if my files look completely different to the files that were approved, that would raise questions. I think that would clean up the industry – not just mortgage broking, it would clean up the bank staff – and prevent deals being made incorrectly.
Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.
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