Australian Royal Commissioner Kenneth Hayne delivered a potentially devastating blow to mortgage brokers taking hefty commissions from banks. But Australia’s Treasurer Josh Frydenberg is baulking at implementing the proposed ban – for now at least.
Out of the 76 recommendations in the final Royal Commission report into Misconduct in the Banking, Superannuation and Financial Services Industry, the only one Frydenberg says he won’t adopt in full is the ban on upfront fees paid by banks and other lenders to mortgage brokers.
The Hayne report instead said borrowers should pay the mortgage brokers.
However, the government argues the crackdown would be problematic. Making lenders pay broking fees could mean people stopped using intermediaries like financial advisors, who in theory provide independent advice.
“In effect you would be putting the mortgage brokers out of business and giving that business to the big banks,” Frydenberg says.
Another issue could be that forcing lenders to pay an upfront fee when they took out a mortgage would make them more “sticky”, or less likely to change providers. Again, that would benefit banks. And eliminating commissions could save the Australian banking industry billions of dollars a year, according to New Zealand stock broker FNZC.
As Frydenberg says: “We don’t want to give the big banks a free kick.”
This news will see New Zealand’s morgage broking and financial advice industry heaving sighs of relief. If commissions from lenders were banned in Australia, it’s likely the same would happen in New Zealand.
Still such relief could be short-lived. Frydenberg isn’t saying changes won’t happen, only they won’t happen immediately.
“The government recognises the importance of competition in the home lending sector and will proceed carefully and in stages, consistent with the recommendation, with reforms to ensure that the changes do not adversely impact consumers’ access to lenders and competition in the home lending market.”
New Zealand mortgage broker Bruce Patten, a director of the NZ Financial Services Group, is in no doubt banning commissions would be inviting disaster.
“Why would a client have to pay for something that they got for free yesterday? Is that something they’re actually going to do?” he asks. NZ Financial Services incorporates the Loan Market brand and has more than 1,200 brokers writing 4,000 mortgages a month
Mortgage brokers have traditionally sold themselves as a free service to consumers but those consumers already effectively pay indirectly with the higher costs lenders charge to cover the commissions they pay mortgage brokers.
Patten says one outcome of banning commissions would mean consumers would have less access to advice and financial education.
“All we will end up with is an erosion of wealth and the rich get richer and the poor get poorer,” he says.
There is certainly a structural issue: in Australia, mortgage brokers write nearly 60 percent of all mortgages.
A similar figure is unavailable in New Zealand because the banks don’t disclose this information but Patten says he thinks it’s more than 40 percent.
“There are 20,000 mortgage brokers in Australia writing 30,000 loans a month. Who’s going to write those 30,000 mortgages every month? The banks won’t because they don’t have the capacity.”
Neither will mortgage brokers be willing to rejoin the banks – most mortgage brokers used to work for banks and were laid off during progressive rounds of downsizing – at salaries of $65,000, Patten says.
Nevertheless, Patten acknowledges that “this whole industry is going to be turned on its head.”
The Financial Markets Authority and Reserve Bank’s report on life insurance released last week – inspired by the Hayne commission – also took sharp focus on commissions.
The FMA’s reaction to the Hayne report is brief: “We are currently reviewing the report and considering its implications for New Zealand.”
Hayne took an uncompromising attitude towards commissions. The interests of consumers and those of advisers and companies providing investment products or services “are not only different, they are opposed. An intermediary who seeks to ‘stand in more than one canoe’ cannot,” he said.
Conflicts of interest can seldom be managed effectively; “self-interest will almost always trump duty,” Hayne said.
As for the rest of his report and the other 75 recommendations, in a note to FNZC clients, the broking firm says the report was less negative for banks and insurance companies than market expectations.
It concurs with Frydenberg that removing commissions would be beneficial to the banks, boosting their profitability.
Things Hayne didn’t recommend include the banning of vertical integration where institutions both produce investment products and then sell them through their own networks, any changes to the National Consumer Credit Protection Act and he didn’t recommend the banning of the Household Expense Measure.
The HEM is widely used by banks is approving mortgages but it is to greatly underestimate household expenses.
Even though Hayne was often critical of the time it takes for institutions to identify and remedy their mistakes, he stopped short of recommending a mandated time frame.
And while he was highly critical of the failure of regulators, the Australian Prudential Regulation Authority and the Australian Investments and Securities Commission, to prosecute bad behaviour, he recommended the regulatory framework be maintained as is.
Nevertheless, “the likely effect of these recommendations is a more litigious environment in the financial services sector and the end of extended negotiations with the regulator.”
But National Australia Bank, whose chair Ken Henry and chief executive Andrew Thorburn Hayne singled out for particular criticism, has said a quicker move to prosecution could be positive for banks by reducing the cost burden, FNZC notes.
An increase in litigation could also provide more precedent and clarity around areas of the law not previously tested.
“Apart from the recommended changes to mortgage broker commissions, other remuneration recommendations were light-touch, in our view,” FNZC says.
It notes that Frydenberg plans to ask the Australian Competition and Consumer Commission to review the recommendation of mortgage brokers’ commissions and the implications for competition.
FNZC says under a “Dutch Model” where lenders pay brokers a flat A$2,500 fee, NAB could save nearly A$200 million a year after four years and Westpac nearly A$250 million, although Commonwealth Bank of Australia would save less than A$100 million a year and ANZ Bank less than A$50 million.
Phasing out trail commissions, annual payments for as long as a mortgage remains on a lender’s books, as Hayne recommends, would save the major banks between A$784 million and A$1.352 billion over five years, the broker estimates.