Best Interests Duty - Recommendation 1.2
The Royal Commission recommended the law be amended to require mortgage brokers to act in the best interests of the customer. The Government has agreed with this recommendation but has given no indication of when the Best Interests Duty will apply to mortgage brokers. Mortgage Choice is supportive of the recommendation and believes mortgage brokers already act in their customer’s best interests.
Mortgage broker remuneration - Recommendation 1.3
The Final report of the Royal Commission made two recommendations regarding how a broker gets paid:
borrowers, not lenders should pay brokers and;
lenders should be prohibited from paying trail commission to brokers.
Mortgage Choice is disappointed by these recommendations and believes Commissioner Hayne has gone too far. If implemented, these changes to broker remuneration could have significant impacts on competition in the home lending marketing, ultimately leading to poor outcomes for consumers. Both sides of Government have shown support for the sustainability of the mortgage broking industry and acknowledged that a borrower pays fee would have significant impacts on competition within the home lending market. The borrower pays option appears to be off the table for now. However, we are likely to see a change to the trailing commission model.
Mortgage Brokers as financial advisers - Recommendation 1.5
The Royal Commission’s final report also recommended that after a period of transition, mortgage brokers should be subject to and regulated by the law that applied to entities providing financial product advice to retail clients.
What does best interests duty mean? How does this change impact Mortgage Choice brokers?
Mortgage Choice is supportive of the recommendation to move to a Best Interests Duty for mortgage broking. The Best Interests Duty already applies to the Mortgage Choice Financial Planning business, so putting these changes into effect will be easier for our broking business than it will be for other mortgage aggregators.
It is important to acknowledge that at present, there is no legal definition of a Best Interest Duty in mortgage broking. We believe that Mortgage Choice brokers generally act in the best interest of their customers, however a legislative change means that mortgage brokers would be required by law to act in the best interests of their customers and keep documentation to prove they have done so.
We believe we are well placed to support our franchisees should the recommendation around best interests duty become law for two key reasons.
Mortgage Choice has leading industry compliance and IT platforms, which allow our brokers to deliver good customer outcomes.
As the franchisor, Mortgage Choice holds an Australian Credit Licence which means we are legally required to keep all documentation pertaining to a loan, which we keep in a cloud based software.
Our industry leading IT software, launched last year, enables our brokers to more efficiently model a transaction and structure a loan scenario to understand a customer’s borrowing capacity and select a suitable home loan product for their needs.
The flexible nature of the Broker Platform software allows collaboration between our agile IT team and in house Lending and Compliance expertise. This enables Mortgage Choice to quickly and seamlessly change or enhance the platform to meet the requirements of legislative changes around best interests duty.
How will mortgage brokers be paid in the future?
What we know so far is that both sides of government have agreed to prohibit the payment of trailing commissions from lenders to brokers for new loans from 1st July 2020. Upfront commissions to be linked to the amount drawn down and volume based incentives will be banned. Trailing commissions on existing loans remain.
At this stage, it is not clear what a future remuneration model will look like. Mortgage Choice is supportive of the current trail commission model.
We have called on the Treasurer to consult with the industry to ensure an orderly and consultative approach to any changes to remuneration structures are fair for both brokers and aggregators.
We believe that changes to trail commission would need to be met by an increase to the upfront commission paid and would need to be commensurate with the current total commissions received under an upfront and trail structure. If the upfront is not commensurate, the broking industry will shrink leaving consumers with less choice, less access to credit and give more power to the big banks which is likely to lead to higher interest rates.
Labor have tabled an option - an upfront of 1.1% paid on the drawn down loan amount and no trail. Whilst this is a starting point, the devil will be in the detail and there are still a lot of conversations to be had.
Furthermore, it is important to note that the recommendations in the final report refer specifically to home lending. Mortgage Choice has a diversified product offering, which includes commercial loans, car loans, asset finance, which provides multiple revenue streams to our brokers.
Both sides of Government have shown support for the sustainability of the mortgage broking industry and acknowledged that a borrower pays fee would have significant impacts on competition within the home lending market. The borrower pays option appears to be off the table for now.
Independent research has revealed that the majority of customers would not pay to use a broker, and those who would, would not pay more than $2000*. To level the playing field, lenders would also need to charge a fee to a customer for originating a home loan. This would increase the cost to the customer by thousands of dollars – a very poor customer outcome.
We believe that adding more costs in the form of an upfront fee paid regardless of whether the customer goes to a broker, or directly to a lender, cannot possibly be a good outcome for consumers.
Fees could prove to be a deterrent for refinancing and switching to a better financial product if the interest savings don’t offset the switching costs. These changes will result in poor consumer outcomes, which is not in line with the original intentions of the Banking Royal Commission.
However, as per the Royal Commission recommendations, the Government will ask the Council of Financial Regulators and the ACCC to review the implications of a borrower pays fee on consumer and competition in three years time. Sense will no doubt prevail.
What does the future look like for Mortgage Choice?
While we can’t say what the future holds, what we do know is that we are adaptable and resilient. Mortgage Choice has been established for over 25 years and we have been able to adapt throughout major change in the economy and property market. Our business model is mature, with a strong operational backbone; robust compliance processes and a single Australian Credit Licence and Australian Financial Services Licence.
Mortgage Choice will continue to fight for consultation with the mortgage industry and for the future of the 17,000 broking businesses across the industry, the future of Mortgage Choice and most importantly, the future of Australians.