Banking Royal Commission Reports & Government reponse

Discussion in 'Loans & Mortgage Brokers' started by Peter_Tersteeg, 4th Feb, 2019.

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  1. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The reports are now available. Attached below, including the governments response.
     

    Attached Files:

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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Govt response, Page 7

    Recommendation 1.3 — Mortgage broker remuneration
    The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.

    Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.

    Govt Response

    The Government agrees to address conflicted remuneration for mortgage brokers. 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.

    From 1 July 2020, the Government will prohibit for new loans the payment of trail commissions from lenders to mortgage brokers and aggregators. From that date, the Government will also require that the value of upfront commissions be linked to the amount drawn-down by borrowers and not the loan amount, and ban campaign and volume-based commissions and payments. The Government will additionally limit to two years the period over which commissions can be clawed back from aggregators and brokers and prohibit the cost of clawbacks being passed on to consumers.

    The Government will also ask the Council of Financial Regulators, along with the Australian Competition and Consumer Commission (ACCC), to review in three years’ time the impact of the above changes and implications for consumer outcomes and competition of moving to a borrower pays remuneration structure for mortgage broking, as recommended by the Royal Commission, and any associated changes that should be made to non-broker facilitated loans. ​
     
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  3. Nodrog

    Nodrog Well-Known Member

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  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    Peter posted the actual report and response (rather than a few links to media reports).

    I was hoping we could have some discussion about what the report actually says (by quoting the report itself) - not about what people think it says based on their interpretation of media coverage.

    If you stop and read the report about mortgage brokers - it's quite long, says a lot of things, makes a lot of assumptions and is easily misconstrued IMO.
     
  5. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    FWIW

    The recommendations are as one would expect

    Anything less than idealistic would bring the house down for the commissioner and team.

    What the collateral implications of such idealistic recommendations are, is not part of the remit of the RC, hence why gov has slowed things a little.

    59 % of borrowers last month are evidently stoopid.............. and misled, we brokers must be doing a great snow job.

    ta
    rolf
     
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  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Some aspects of the proposed broker changes will limit consumer benefits and favour the mug who calls their bank to be ripped off. Eg refinancing will not earn a broker without a draw down. This just encourages new credit even utilised in a offset at expense of better loan deals on the core balance.
     
  7. Harry30

    Harry30 Well-Known Member

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    I recently refinanced x2 loans via a broker. Got a $2,000 payment upfront for my trouble from the bank (thanks). Broker did all the work. So, under the Royal Commission recommendations, I go from paying nothing at the moment (absolutely zero), to paying around $6,500 upfront. The big fat greedy bank (to use the language Hayne would use if you caught up with him for a few beers) would go from having an expense of $6,500 to paying zero to originate the loan.

    So how does this make the consumer (me) better off?

    Oh yes, according to the RC, the broker will be working for me and not the bank. Hang on, that’s what happens now. He is not conflicted. He does not care now where he puts the loan. Apart from trivial differences, he gets remunerated regardless of who he puts me with. So, where is the conflict?

    Maybe this is just an attempt to put the broker out of business. Then I am dealing once again with the average Joe in the bank. Or maybe the Private Banker I was allocated some time ago by one of the Big 4. Boy, was that guy on the ball.

    Anyway, back to the topic. How will I be better off under these recommendations?
     
  8. Ghoti

    Ghoti Well-Known Member

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    "The people" have gotten what they asked for. Transparency (they pay brokers direct), accountability (they'll have to provide further evidence of financial status) and simplicity (less competition, likely higher rates).

    Not disputing there were some shenanigans going on that needed to be stamped out, particularly in the wealth & insurance businesses. However individuals also need to be responsible for their actions - rather than bitching when they can't afford the loan they lied to secure.

    Babies and bathwater certainly come to mind!
     
  9. Harry30

    Harry30 Well-Known Member

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    The other thing that strikes me about the recommendations from the RC is the strange view about trailing commissions. They recommended to eliminate them as the broker is not doing anything ongoing following settlement of the loan. I am not sure I accept this, but let’s accept the point for the moment. Does that make the trailing commission illegitimate? By what economic principle must the remuneration structure exactly correlate to the effort expended. Think of the retainer you pay to your lawyer. Why not make it just fee for service. Sales people get ongoing retainer + commission. The trailing commission to the broker is like the ‘retainer’.

    Ultimately, employers structure remuneration in different ways for different reasons. Direct reward for direct effort is but one consideration, but not the only consideration. You also need to sustain the person in the industry, and ensure some steady income stream in the periods when they are not crunching the loans (like during holiday periods for heaven sake).

    I felt the findings of the RC on the subject of trailing commissions to be simplistic.
     
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  10. Harry30

    Harry30 Well-Known Member

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    Good points. Regarding transparency, everyone knows the broker gets paid commission, upfront and trailing. It is completely transparent. In fact, you generally sign a form acknowledging that you are aware of the exact Commission structure.
     
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  11. Harry30

    Harry30 Well-Known Member

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    If the RC findings are implemented in full, and the whole industry and consumers are regulated to an inch of their life, do you know what I am going to miss? Yes, those A Current Affair bank bashing stories. You know the ones about the Big Bad Bank who lent too much to that little Aussie Batler. The one who knew the HEM was wrong, but just went along with the fraud. Investment goes belly up, and who is to blame. You guessed it, the bank. The bank should not have approved the loan in the first place, says the reporter in that stern voice. With all the new regulations, all those problems will just be a thing of the past. Perhaps I will just stop watching. Oh hang on, we will still have those A Current Affair stories about boob jobs gone wrong, won’t we. They are always good fun. And what about those stories about ‘my family is so poor, we have to eat dog food’. Remember those stories. We’ll still see those I hope. Hey, life is not so bad after all.
     
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  12. bumskins

    bumskins Well-Known Member

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    I think the problem with trailing commissions is they are conflicted pay.

    The bank pays the broker the Trailing Commission only while the borrower maintains that original loan.
    It's cancelled otherwise. That nexus is the problem.
    It's not simply an upfront payment + $X streamed over a fixed period of time.
    The Broker is now being incentivised to not touch/move the loan.

    The next perceived conflict is Broker's choosing/only presenting loans based on what gives them the highest level of remuneration.
     
    Last edited: 5th Feb, 2019
  13. beachgurl

    beachgurl Well-Known Member

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    A broker would make much more money if they churned the loans every few years rather than relying on trail income. It's where other countries are at whose banks dont pay trail. E.g. on a 1mil loan, a new up front would be $6500 vs $1500 per year trail.

     
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  14. Simon Hampel

    Simon Hampel Founder Staff Member

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    Final Report - Volume 1, page 81, section 2.5 "Brokers as advisers"

    The further issue to be considered is presented by the very point at which the debate about mortgage brokers begins. Consumers go to mortgage brokers for advice. The advice the consumer seeks is about what ordinary parlance would see as a financial product – a secured home loan.
    And the transaction about which the consumer seeks advice is very important to the consumer. For many it will be the most important and the most expensive capital acquisition they make.

    Why not regulate mortgage brokers in precisely the same way as any other person who is to provide personal advice to a retail client? Why not treat mortgage brokers as financial advisers?

    I know that doing this would bring with it the requirement to provide written statements of advice. I know that it would bring with it the educational requirements expected of other financial advisers.

    But what reasonable answer can be given to the observation that the special and distinct treatment of mortgage brokers is no more than yet another carve out from, or exception to, generally applicable rules stated in the law because they are seen as necessary to the proper conduct
    of provision of financial services in Australia? None is evident to me. I consider that after a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies
    to entities providing financial product advice to retail clients.

    ...

    Recommendation 1.5 – Mortgage brokers as financial advisers
    After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.​

    Government response:

    The Government agrees, following the implementation of the best interests duty, to further align the regulatory frameworks for mortgage brokers and financial advisers.

    This also responds to the Productivity Commission’s report Competition in the Australian Financial System, which also recommended imposing a best interests duty on mortgage brokers and a review of the feasibility of enabling financial advisers to also act as mortgage brokers.
    My thoughts - you will now get two things happening:
    1. the barrier to entry into the Mortgage Broking industry will be significantly higher, making it more difficult for new entrants, especially those working as individuals like they do now. You will basically need to be a fully qualified financial adviser to be able to write loans and there will be significant cost to enter that market and maintain your compliance.
    2. existing financial adviser businesses will start to offer mortgage broking - so you will have a large number of providers who are no longer focused on a single task (writing loans) giving advice based on boilerplate provided by their licensee - which will not necessarily lead to better consumer outcomes.
    3. The costs of writing loans is about to become a lot higher, while the remuneration provided is about to be squeezed significantly - there will be a large number of brokers who can no longer afford to be in the industry, thus concentrating the power in the hands of the larger operators, reducing competition.
    Basically, the days of the specialist mortgage broker are numbered - the financial planning industry (the bastions of decency sound consumer advice that they are :rolleyes: ) will now take over the role.

    Perhaps I'm reading a bit too much into the once - sentence response from the government on this matter? There is a distinct lack of detail about how this might work.

    My guess is that it will take quite a few years for this change to be implemented.

    Look for a lot of consolidation in the meantime, and some pre-emptive partnering between mortgage brokers and financial advisers!
     
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  15. Harry30

    Harry30 Well-Known Member

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    Those arguments mirror the points put by the RC. Take your last point, about the broker wanting to push products where he or she gets the highest remuneration. That issue exists in every commercial transaction in a market economy. Think of your mechanic. The argument is that he or she has an incentive to tell you the whole engine is broke when it is not because he or she gets a higher payment for a complete engine replacement v minor repair. Mechanics who engage in that type of behaviour may get away with it once or twice, but will not be in business for long. Similar with any broker who does the same.
     
  16. willy1111

    willy1111 Well-Known Member

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    I think they have missed the mark on Mortgage Brokers.

    Mortgage Brokers are like a supermarket for home loans, a borrower goes to CBA - all they sell is CBA Home Loans, go to Westpac - all they sell is Westpac Home Loans - go to a Mortgage Broker and they sell loans from a variety of different lenders, just like a supermarket sells a variety of different branded products - try going to the milk fridge anyone :)

    They offer assistance (often called advice) to help the borrower choose the lender and product that is suitable for the borrowers requirements and objectives - it is not rocket science commissioner!

    So perhaps the question becomes . . . Are Mortgage Brokers advisers or salespersons?

    I think I would tend to say more so the latter - they are paid based on a sale not advice, generally they only talk about products/lenders they are paid by. If they are salespeople - the current model works best.

    I think the commissioner is trying to say they are advisers and thus should be treated differently. The industry hasn't helped itself either, trying to make themselves look more professional status rather than sales status, wanting to put themselves in the same category as Accountants and Financial Planners - they have been wanting to position themselves more so as advisers rather than salespeople.
     
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  17. Harry30

    Harry30 Well-Known Member

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    Very good points. Many of criticisms fall away when you look at it like that. Thanks.
     
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  18. paulF

    paulF Well-Known Member

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    Still early days and even though both sides of politics are saying one way or another that they they will 'take action' or 'agree in principal' with the recommendations, it doesn't mean that things will change drastically. These are politicians that we are talking about after all.

    Such a let down though pouring most of the blame on the brokers. I don't think the word corruption was even present once in the whole document and no direct prosecutions recommended either.
     
  19. Trainee

    Trainee Well-Known Member

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    People got what they asked for. Except you dont know what you dont know. Wonder how many people will scratch up their credit files by shopping for loans themselves?
     
  20. albanga

    albanga Well-Known Member

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    I’m very sorry for the fantastic brokers in PC, this is a very sad day for you and your families.
    Your businesses have already been hurt of lately thanks to APRA changes resulting in significantly more work per loan application at no increased revenue.

    You have recently lost upfront on cash outs which we all know is the most ideal structure for investment purchases. You now work for free unless they spend the money in 30 days which would almost never happen.

    Your now literally not going to be paid a trail income which reduces your revenue by a huge amount.

    I know some of you are going to put on a brave face and fire off a lot of cliche comments “our business will find a way to adjust”...
    The reality is staying in the industry makes almost zero sense. I would argue you could get paid more with ZERO stress as a loan processor.