Banking Royal Commission Reports & Government reponse

The No 1 Rule in business is:

When one makes a decision in business, one must ensure the customer wins, the employees win and the company (owners/shareholders) win.
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This rule applies to every decision made by everyone in the business, no exception.

If not, the business won’t be successful (as it could be) and/or sustainable.

The banks failed this basic rule big time.

 

There is a petition going to save the mortgage broking industry on change.org. Over 40,000 signatures already.

Sign the Petition

 

The fee for service argument doesn't allow for the work we do for the lender and the overall acquisition costs for smaller banks to get customers. The productivity commissioner stated that ALL the non majors (ING for example) would have to open 118 branches EACH to keep current market share if no brokers, End of argument.

 

I don’t think anyone could possibly argue that if we go fee for service that any lender that doesn’t have a branch network or plays purely in the non conforming space will be gone.

I think with time that will even include ING.
Unless they make a play for the Big5...

 

The RC into milk prices analogy

 

I'm trying to find a link however the MFAA or similar released a campaign today in response to the RC - anyone have a link?

Bit like the mining tax, the voices will get louder.....please all sign the petition and contact a local member to make the voices louder.

Remember the mining tax didnt go through due to lobbying - this will put 25k people and businesses out of work!

Don't lose the passion on this one guys, this is just wrong and no one can see the sense of it.

Cheers Ivan

 

For end consumers this link goes directly to the petition:
Your broker behind you | Support your broker

Campaign site for those interested:
Your broker behind you | MFAA

Cheers,
David

 

After doing some reading and thinking g about things, I can't see how much it would be from the current situation if an upfront fee is charged (that can be capitalised into the loan) and that banks are required to maintain channel neutrality by splitting out their origination costs and providing brokers a wholesale rate (that they would their own BU) and charging an application fee that reflects the acquisition cost. This is like the Dutch model
Let's say that I'm borrowing $500k on a 600K purchase, my requirements are fairly simple and that the loan is pretty basic.
Say that the broker commission and direct bank application fee is $7500 (using round figures here).
The interest rate for the loan is the same wholesale rate for both bank and broker.
That $7500 is capitalised into the loan and the loan becomes $507 500 for loans both from the broker and directly from the bank.
Both the bank and broker take their fee at the start directly from the loan.
The devil will be in how retail and wholesale are split and how it is determined what is a an accurate charge that would have to be mandated by regulation or law to maintain channel neutrality and accurately reflect origination costs by the bank directly.
If the above scenario does hold, I don't see much difference from the current arrangements except the broker is paid their commission immediately from the loan.
How would this disadvantage brokers if it unfolds like above? I can't see it.

 

Good post. Yes, should come out in the wash if banks are required to be neutral between channels. Presumably, banks will also need to reduce the interest rate to account for the fact that some of their costs are now covered by the up front charge. At the moment, this cost is built into the interest rate. You could argue that banks will never pass on this saving. That may be so, but keep in mind there will be other lenders who may not charge this fee (unless the regulatory structure can be so all encompassing as to apply to every single person or company that lends money), and the banks will inevitably lose out to those operators, particularly given customers will always preferred paying this cost over the life of the loan (ie. via the slightly higher interest rate) compared with a lump sum charge upfront.

 

It would possibly work out very similar - but is it likely that it will pan out like that?

 

I guess should the broking industry devote its energies to achieving such an outcome rather than simply naysaying what the royal commission is suggesting?
Is trying to cling to the present a good idea?
Is it worth fighting the current wars about trailing commissions and the conflicts of interest they entail (pun not intended) or is more worthwhile concentrating lobbying efforts on shaping the future about things like channel neutrality?

 

I am not fighting anything, just going with the flow. But no matter what the brokers do I think the banks will make sure it doesn't pan out like that.

 

We don’t need to theorise how customer fees work, we can just see how the Netherlands do it surely?

Fee-for-service ‘failed’ in Netherlands

 

I saw that and thought it was heavy on spin and light on detail. It says that market concentration increased in the Netherlands but don't prove how the changes to the mortgage rules did that - the decrease in bank numbers from 2007 to 2017 that was quoted could have been all due to the GFC (the dutch bank system was turned upside down by the GFC - Fortis went bust, ING had to take state aid, ABN AMRO was effectively reconstituted from seized assets of Fortis by the Dutch government, etc)
It listed one bank- ABN Amro as having increased interest margins. What about the rest of the industry - is this cherry picking?
I wasn't sure if the piece was simply bad writing or heavy in spin to fit a preconceived agenda.
It doesn't really prove how the changes to the broking model changed the market for brokers at all in the Netherlands. What they got right, what the got wrong and could it be improved upon - these are are all part and parcel of an analysis of such reforms that wasn't present.
I would want a more objective analysis about the Dutch experience.
I don't think the drive to remove conflicted remuneration will go away.

 

It is light on detail. Surely Hayne would have had much more thorough examination of the evidence.
There must be other countries with similar models to study? Regarding abn increasing their margins, if it’s a competitive market the other players will have similar numbers to the biggest player wouldn’t they? You can’t become the biggest player in a competitive market by charging more.

 

I would have liked to see stats on broker share, and broker income like we do here. But that wasn’t reported. Maybe Choice could dig up some research and we can all do their one big switch.

 

Banks should be careful what they wish for here. You can always call on the regulator to enact a law that is in your commercial interests, much like what the banks have done WRT the Royal Commission. But once it gets into the political sphere, you lose control over how the law will be enacted, and you may not get the result you want. Despite what Kenneth Hayne says, regulations will always have unintended consequences, including in this case for the banks. Just remember the Liberal Party’s industrial laws (thou shall be free to either join or not join a union). It was suppose to be a weapon against the unions and ALP to eventually abolish compulsory unionism, but that very law was used by the unions to win the waterfront dispute. All unintended.

 

Could they have been aggressively discounting to rebuild their market share (the brand had disappeared after being bought out by Fortis in the Netherlands, before being reconstituted in the aftermath of the GFC) and then eased off once they did, restoring interest margins?
There's a lot more context about the wider market that needs to be considered - I think that they should have at least acknowledged that there are other factors at play before jumping to such emphatic conclusions.

 

@noogie60 overall your proposal appears sound, but there are a few flaws in the implementation.

1. The banks won't pass on the savings, or they'll find ways to negate the wholesale discount to brokers.

2. Capitalising the fee doesn't really benefit borrowers in the long term. If borrowers refinance every few years chasing better rates (as they often do now), they may find their loan never really reduces because of those fees.