The Royal Commission has handed down it’s recommendations last week and we agree with all recommendations, except one.
We wholeheartedly support increasing the barriers of entry to the mortgage broking profession. In fact, we would advocate that all future entrants be degree qualified to become financial, mortgage or property advisers.
We particularly agree with the ‘Best Interests’ duty – requiring mortgage brokers to act within the best interests of their clients (and we’re surprised it’s taken so long!). We believe that all advisors and providers in the financial services industry should have this duty to their clients.
Unfortunately, property advice is still neglected and unregulated, much to our chagrin. This will change and come into force at some point in the future. In the meantime, we continue to be at the vanguard as the only company in Australia to provide fiercely independent property advice via a ‘pure planning’ advisory service where we do not receive any fees from buying or selling property, nor selling any investment or insurance products.
What we disagree with, is the recommendation for consumers to pay a fee-for-service to obtain a mortgage. Importantly, this proposed fee is supposed to be payable whether the mortgage is organised through a mortgage broker or lender direct and Commissioner Hayne has rightly suggested that this is important to ensure a ‘supposed’ level playing field, if ‘fee-for-service’ be legislated.
Why is ‘fee-for-service’ needed?
The evidence is irrefutable that consumers are happier using brokers than banks. The Consumer Access to Mortgage Report found that out of 5,800 people, 96% were satisfied or very satisfied. Further studies show that there is a higher satisfaction rate with brokers than lenders direct.
In fact, only a fraction of the complaints received by the ombudsman relate to mortgage brokers, despite the industry introducing more loans than the major banks.
At Property Planning Australia, we ask for feedback at three important junctures during the client experience; when a loan is approved, when a loan is settled and after we resolve a query post-settlement. Our average score is 9.6 out of 10!
Most major banks have a negative or just above zero score which would imply they average a 6 to 7 out of 10 response.
It is unsurprising that a recent Deloitte report into the mortgage broking industry showed 70 per cent of a broker’s business is generated from referrals. Brokers do not have advertising budgets like the big banks. Yet they have managed to not only survive, but to grow and thrive through providing great advice and service.
How else can the percentage of consumers choosing mortgage brokers grow so rapidly?
Real World Evidence
Despite offering a mortgage broking service, we have also spent a lot of time and money developing a mortgage strategy fee-for-service offering for people who want to ensure that the strategy is free from lender selection or commission bias.
In the last two years, around one in a hundred clients has opted for this service.
Most consumers do not want to pay a multi-thousand dollar fee for a mortgage.
I do not believe consumers will want to pay a multi-thousand dollar fee in the following circumstances:
- For increasing a loan for by $20,000 for a renovation.
- To determine if they can borrow money to begin with,
- To determine which lender policy suits their objective and personal situation given around 80% of incomes include bonuses, commissions, overtime, allowances, contracting arrangements or self-employed income which all have different interpretations based on the lender.
This is all without even considering mortgage strategy advice.
We would advocate a separation of advice from selling products and interest rates, but that is a whole different conversation and unfortunately one that Commissioner Hayne did not delve into, as many thought he might. It will come at some point in the future which is why we already provide this clear separation as a choice to all clients!
Why was fee-for service recommended?
Commissioner Hayne’s commentary in the report regarding this recommendation for fee-for-service on mortgage advice predominantly references evidence from the Commonwealth Bank and its CEO Matt Comyn.
The single largest entity to profit from this decision. For a man focussed on conflicts, it is striking that Commissioner Hayne could not see the obvious conflict of interest here.
A mortgage broker was never called as a witness to the Royal Commission. The mortgage broking industry was represented by a manager, from Aussie Home Loans mortgage brokers. However, they are owned by the Commonwealth Bank, who stands to gain the most from this decision. Another obvious conflict of interest that was surprisingly missed by Commissioner Hayne.
Unsurprising, the day after the Royal Commission, the big 4 banks had their single biggest value jump in years, with close to $20 billion being added.
The banks most profitable product, a mortgage, is about to become even more profitable based on a Royal Commission into their own misconduct.
How ironic the Royal Commission into banks proposed a recommendation to eradicate the competition based on evidence and statements provided by the company and individual with the most to gain from this outcome.
What is the impact of this recommendation on you?
1. Higher fees: Consumers will lose out and be required to pay a fee of $3,000 to $6,000 to obtain a product they currently are provided for free.
2. Higher rates: Over the 20 years since mortgage brokers started getting paid upfront and trail commissions, the profit margin that banks make on a residential mortgage has reduced from 3.5% to 2.2% above the cost of providing you with the loan. This is estimated to save borrowers $22 billion per year right now.
3. Less choice: The number of lender options for consumers has grown significantly since lenders started paying mortgage brokers commissions. Why? Because smaller lenders and future start-ups have a ready-made work force whom they pay 30 to 60 days in arrears after they begin receiving an income from the settled mortgage.
4. Less advice and service: Price tends to align with quality. If you are paid less, you do not have the same capability to provide the same amount of time. Brokers also currently have an incentive to continue to service their clients once the loan settles. This will cease.
5. More hassle: Without brokers, the 60% of consumers who use brokers will need to talk to multiple banks, research the 2,500 plus products, consider optimising interest deductions, separating good and bad debt, redraw and offset, ensure they do not fall foul of the ‘purpose test’ with the ATO, interlinking mortgage structures with money management systems, consider risk management through buffers and fixing, develop cash scenarios on different purchase prices, rates and rental incomes, figure out the pros and cons of cross collateralisation, using one lender or multiple, differing lender policies and the rest…… Need I go on!
What can you do?
It’s clear that the fee-for-service recommendation is a poor outcome for consumers – having to pay a thousand dollar fee for something that you’re currently getting for free, without any ongoing or lead up service!
If you don’t want to pay a fee for your mortgage, make your voice heard by visiting the Broker Behind You website and:
Sign and share the petition: There is a petition available at the broker behind you website– please sign the petition to ensure policy makers understand the weight of support.
Share with your friends and family: how many of your friends and family members have a mortgage or are looking to purchase a property?
Send the pre-populated letter to your local politician through the link above. Contact your Federal MP via the website and let them know how you feel. This will take you less than one minute and has a significant impact.
Thank you for your support.
David Johnston and the Property Planning Australia team.