Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

Banking Royal Commission Recommendations – my comments

I was lucky enough to be interviewed by Jenny Seaton for Curtin Radio last month and talk about my take on the Banking Royal Commission recommendations.

Luckily, since then, the major political parties have come out and decided to not accept a recommendation on a user pay model which will simply reduce competition and move people back to the big 4 lenders.

Here are my key points:

  1. There were 76 recommendations made and 10 of them effect mortgage brokers.
  2. A recommendation to move to a “best interests duty” for mortgage brokers. The mortgage broking industry has been moving to a similar standard over the last few years so this won’t have much of an impact. The issue is defining “best” as it isn’t simply interest rate alone. Canada has recently come out and said their implementation of “best interest duty” was too difficult to define as lawyers couldn’t agree on the definition. I suspect Australia will have a similar result or the guidelines will be broad enough to have them workable.
  3. Recommendation of increased scrutiny around borrower expenses when applying for a home loan. This was a general recommendation for all lenders which also impacts mortgage brokers. Banks can’t use default values for borrowers expenses. This has been true for a number of years now anyway so this means banks will have to do what is legally required. All Orange clients know that the detailed budget we request had 85 individual line items and if required we spend a lot of time making sure these figures are correct. We’ve been doing this for the last 8 years now so there is no change for Orange as we’ve been doing as required (more than required) as a part of our normal business.
  4. Recommendation to have clients pay mortgage brokers direct. Here is where the contention was/is:
  • There have been numerous studies by the Productivity Commission, the Australian Competition and Consumer Commission, the Reserve Bank of Australia and Australian Securities and Investment Commission that showed that the current commission structure did not negatively impact consumers (with some minor changes already implemented) and going to a user pay model will severely restrict competition for smaller lenders and lenders without an extensive branch network. Only the Big 4 lenders would be able to compete.
  • The only major lender to recommend the user pay model is CBA for the obvious reasons.
  • There is a perception that this will reduce cost which will ultimately reduce interest costs for borrowers. Under the user pay model the majority of brokers would leave the industry and my belief is then the cost for home loans would increase because the cost of having bank staff manage the home loan process is more expensive than mortgage brokers (ignoring also the fact that the service from banks would be of lower quality). KPMG and PWC have looked at the costs of bank personnel at the Big 4 and they estimate that 1 headcount’s operating cost plus salary is $235,000 per year versus the average mortgage brokers operating cost play pay per headcount is $135,000. Why is this? the operating cost for one headcount alone at a big 4 bank is $80,000-$100,000 because its  expensive to have IT, HR, office space etc. Most mortgage brokers are sole operators who can limit their expenses and hence provide a better quality and more cost effective way to promote competition and the manage the home loan process. Here are the reports from KPMG and PWC. Reference KPMG 2017 https://home.kpmg.com/au/en/home/insights/2017/11/major-australian-banks-full-year-2017.html and PWC 2016 :https://www.pwc.com.au/publications/assets/major-banks-analysis-11-nov-2016.pdf