The Hayne report was handed down and released to the public on Monday afternoon of last week. Very few expected that brokers would bear the brunt of the sweeping recommendations made by Hayne, and that the big 4 banks, who were ‘allegedly’ the ones committing the horrific acts were essentially off the hook. You may recall the allegations made of charging deceased clients fees, ongoing fees for no service, inappropriate selling of insurance policies to those who neither needed it or could afford it and consistently recommending in-house products.
We need not look much further than their share prices over the week rallying between 5 – 10% to assess how the ‘big 4 banks’ have taken the news of the Royal Commission report. This week we’d like to outline the recommendations, stress that they are in fact just recommendations at this point and explore how they could impact borrowers in future.
First and foremost, we would like to point out that the Hayne report is a list of recommendations and this is not yet legislation. The Government response, which you can read here if you so choose, has been to agree with the majority of recommendations, however there is no guarantee that any of the recommendations will become legislation.
Let’s get into the key recommendations impacting the mortgage broking industry and of course you, and the Australian public, as borrowers.
- Mortgage brokers must act in the best interests of their clients
In our opinion, this is a great step forward for the industry, and is something that great mortgage brokers have been doing for years. Enforcing the best interests duty for mortgage brokers will solidify the industry and hold professionals operating within it to a higher standard. Put simply, this will mean that the broader public, and yourselves as borrowers, can have even greater confidence in working with professional mortgage brokers like Loansuite.
- Trail commission on loans should be removed immediately and upfront commission removed in 2 – 3 years’ time
It was outlined by Hayne in the report that trail commission was effectively ‘money for nothing’ and therefore should be removed. It was also argued that upfront commission should be significantly reduced or removed altogether in 2 – 3 years’ time. We feel that Hayne has missed the point here and doesn’t have a great sense of community expectations. Excellent mortgage brokers should be regularly reviewing as required the loans and financing strategies of their clients, such as when a fixed rate loan is approaching its expiry or an interest-only term is nearing completion of its term to ensure that the financing strategies remain aligned with their clients’ financial goals. This is a clear case of the Commission failing miserably to recognise the value that mortgage brokers add.
To dispel any other myths floating about, the lack of trail does not mean that borrowing costs are going to get cheaper and interest rates will come down, it simply means that the profit margins of the ‘big 4’ banks in particular will rise. This is evidenced by the fact that the share prices of each of the four Australian banks rallied last week, while the mortgage aggregator groups such as AFG traded in the opposite direction. To further highlight the fact that banks will not be passing on these savings to borrowers, we can simply explore the long-term decline of net interest margins over the past 30 years. This is outlined in the graph below:
There is no doubt that there are certainly some ‘bad eggs’ in the industry that are genuinely receiving trail commission for absolutely no work, and this should not be the case, however banning trail commission altogether is an ill-informed overstep in our opinion. A more sensible option, we believe, would have been to limit or even step-down the trail commission paid over time to encourage mortgage brokers to continue to service and look after their clients.
- Borrowers should pay mortgage brokers a fee instead of the banks paying commission
This recommendation has created some confusion, particularly on Australian broadcasting channels, thanks in part to the ‘brain-fart’ of ‘a presenter on a well-known Australian breakfast program last week to suggest that this was now in effect immediately and all new borrowers would have to pay a mortgage broker a fee. Please note that this is not the case, and it is business as usual until further notice. Exactly how a fee structure would operate is yet to be fleshed out, but for us we will be continuing to look after our clients and ensure that financing strategies remain aligned with financial goals.
The mortgage broking industry is fighting the recommendations, and a petition has been launched, which you can sign here to support our colleagues.
Mortgage brokers are essentially in keeping competition alive, and avoiding borrowers having to spend hours on the outsourced ‘customer service hotline’ to arrange a home loan. We look forward to a sensible proposal here to take this industry forward.
LoanSuite Pty Ltd is your lending partner for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.
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LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.