The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was release this afternoon and the recommendations on mortgage brokers represent a huge win for the Big Four bank however it could miss the mark of better outcomes for consumers and destroy the lively hoods of many Mortgage Brokers, most who are small business owners and work hard to help their clients realize their dream of home ownership.
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.
Mortgage and Finance Association of Australia (MFAA) CEO Mike Felton said these recommendations did not represent a good outcome for consumers.
“These policy recommendations are effectively a new multi-thousand-dollar tax on borrowing. They will put the broker channel at severe risk, damaging competition and access to credit and entrench bank power,” Mr Felton said.
“As reviews by ASIC, the ABA and the Productivity Commission have found, brokers drive competition by providing a shopfront for smaller lenders, particularly for rural and regional customers. We are critical to the health of Australia’s mortgage lending market.
“I fail to see how decimating the broker channel, leaving Australians with a handful of lenders to choose from, is good for competition, or good for customers,” Mr Felton said.
“At this stage it is still unclear whether the Final Report is recommending a consumer fee-for-service or the so-called ‘Netherlands’ model.
“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 recommendations also referred to a “lender fee” at a branch level alongside a consumer fee-for-service to ‘level the playing field’, or the so-called ‘Netherlands’ model.
This recommendation ignores key elements of the Netherlands model that are critical to understanding the way it works.
“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.
“Another key aspect of the Netherlands model that has been ignored is 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.
“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.
“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.
I hope that our industry can continue to help our clients for many years to come.