On Monday the 4th of February 2019, after an extensive investigation into what was described as appalling behaviour in the banking industry occurring over a decade, which included alleged bribery, failure to verify customers living expense, forged documents, putting customers in financial hardship, selling of insurances and even charging fees to clients who had died, the Royal commission into the banking industry released their final report, recommending 76 changes to the financial industry, most notably ones relating to the broker channel.
We will begin by saying that we, among other good, honest, hardworking Australians do not condone the major banks actions and agree with many points of the royal commission’s investigation and encourage responsible lending. As a team of self- employed local finance brokers, we have felt the effects of the changes that had begun being implemented from over a year ago, and although change is difficult, change is also necessary for a business and an industry to grow. So as a business we took it all in stride and felt positive that this will “drain the swamp” and leave a market of more honest and reputable brokers to continue working into the next era of finance.
So why is it that coming out of Monday, an investigation and a report that was to lead to a better outcome for the consumer and was to hold the banks accountable for their actions, resulted with what is shaping up to be one of the biggest blows to small business and the economy. The bigger question is why the banks have come out of the whole thing fine? So much so that all 4 banks shares increased the following day whilst mortgage brokers dropped by 30%. There are also allegations of insider trading to the tune of $22 million which indicated information from the report may have been leaker ahead of time and the outcome was always looking to be positive for the big 4.
Commissioner Hayne called for a move away from a lender paid commission to a consumer paid fee, and a ban on all trail commission. He also called for a fee for service model whereby the consumer would pay a fee to the broker in lieu of the commission to the lender. What they failed to consider is the impact this would have on the broker and the industry as a whole. By all accounts and reports it has been made evident that majority of consumers are not prepared to pay an upfront fee to a broker. This fact alone means that business will be funnelled to the big 4 banks with the majority of brokers going out of business and the banks competition will be crushed.
Currently, the local brokers hold the relationship on a personal level with the client, they give a direct line of contact and will likely be accessible to them 7 days a week, during and after office hours. The banks can never replicate this on a corporate level. The bank works, and will always work, in the best interest of its shareholder. The reason a broker gets the trail commission, is that it is a deferred upfront commission to allow for the on-going work and communication that goes on between a client and a broker after a loan has settled.
The government has now agreed to “remove conflicts of interest between brokers and consumers by banning trail commissions and other inappropriate forms of lender-paid commissions on new loans from 1 July 2020 with a further review in three years on the implications of removing upfront commissions and moving to a borrower-pays remuneration structure”. What does this mean for the broker industry and for the consumers? Is this a problem being swept under the rug for a later date?
The final outcome remains to be determined however with elections on the horizon and political pressure mounting, there has been a very clear groundswell from the broker channel pushing back against the changes. These changes can result in thousands of businesses and lives being impacted which will have a broader impact on the economy. Brokers have access to multiple lenders, all with a different niche that they support. Such examples may be self-employed applicants, applicants on maternity leave, nature of income such as commission based sales roles and applicant purchasing through superannuation fund or a trust. A good broker is well versed with what is available on the market and understands that no one application is the same.
Although there are some positive outcomes for consumers from the Royal Commission report, the overall consensus seems to be that all brokers have been painted with the same brush. They are sending the message that all loans and all consumer situations are the same and that the work of a broker is not needed where in-fact it is the exact opposite of the. The big banks have benefited the most with the brokers left to fight for their business and the marketplace divided into those that can afford the fee for service and those that will left without a choice but to go direct to the banks.
We encourage you to support brokers and keep competition alive. Now is the time to assess your situation before the changes come in.
Click below to speak with our team and we will be happy to answer any questions you may have.
