Tag: Mortgage Brokers

Mortgage Brokers Heyday Over?

From The Adviser.

Slower credit growth and reduced borrowing capacity are expected to wipe 10 per cent off volumes this year, but brokers may find a silver lining in their trail commissions.

Investor lending has fallen by 16.1 per cent over the year to March, while owner-occupied lending is off by 2.2 per cent, according to the Australian Bureau of Statistics.

The latest housing finance statistics show that lending to owner-occupiers fell by 1.9 per cent in March, the highest rate of decline in over two years; investor lending fell by 9 per cent over the month.

However, these figures are yet to reflect the latest round of credit tightening by the major banks, who face increased scrutiny amid damning evidence of irresponsible lending during the first round of the royal commission.

Both the major banks and the RBA expect credit growth to slow.

Digital Finance Analytics principal Martin North believes that we are now entering a “credit crunch”, which will reduce total mortgage volumes by around 10 per cent over the next year.

Mr North said that the changing credit landscape paints “a complex picture” for brokers.

“The chances are that people will not be moving as swiftly as they had previously, so you might find that, in fact, the trail commissions go on for longer, which is a good piece of news,” Mr North said.

“But in terms of new business volumes, not only is there lower demand now, particularly for property investors, but tighter lending criteria means that brokers will have to work a lot harder to get the information from clients and go through more hoops to get an application processed. Overall volumes will be down.

“My own feeling is that we haven’t yet seen the full impact of the tightening that is happening as we speak. I’m predicting about a 10 per cent fall in volumes over the next year.”

Mr North told The Adviser that cooling property prices may force some property owners in Sydney and Melbourne to capitalise on years of growth, sell up and downsize.

However, he believes that first home buyers are unlikely to fill the gap and that any government incentives are now failing to encourage new mortgage sales. The latest ABS figures show that the percentage of FHBs fell to 17.4 per cent over March.

In addition to tighter credit conditions, mortgage brokers also face increased compliance in response to a slew of inquiries.

“This may mark the point in the cycle where some brokers decide to quit the industry,” Mr North said. “You may end up with a smaller number of brokers. I think there will be a bit of a shake-out.”

Greater scrutiny and increased regulation is the primary driver of tighter lending conditions. However, with the RBA signalling that the next cash rate movement will be up, Mr North sees little indication that the situation will change.

“I don’t think there is anything that will reverse that any time soon,” the principal said. “If anything, rates will go up, further tightening credit. I don’t think this is a temporary shift; it’s a realignment of the market. People need to start planning their businesses on a different trajectory.

Scrutiny, Regulation and the Looming Credit Crunch

This from the excellent James Mitchell at the Adviser.

I’ve said before that the next downturn will, ironically, be triggered by regulation. Recent developments show this could soon play out.

This we week we’ve seen ANZ chief Shayne Elliott and RBA governor Philip Lowe both admit that lending is becoming more difficult.

On Tuesday, Elliott said that tighter controls around customer living expenses — an issue given extensive coverage during the first week of the Hayne royal commission – would slow lending down.

Later that day, the RBA governor issued a similar warning following its decision to leave rates unchanged for the 21st consecutive month.

“It is also possible that lending standards in Australia will be tightened further in the context of the current high level of public scrutiny. We will continue to watch these issues carefully,” Mr Lowe said.

These comments follow APRA’s decision to remove the 10 per cent investor lending speed limit in favour of debt-to-income curbs.

Exactly what these will look like remains to be seen, but the banking regulator expects ADIs to develop their own portfolio limits on the proportion of new lending at “very high” debt-to-income levels.

The problem with things like forensic evidence of customer living expenses and tighter restrictions on mortgage lending is that they will reduce credit availability.

About 10 months ago I wrote that “mortgages are the second largest pool of assets in Australia after superannuation. Messing with that could have serious implications. Particularly at a time when property price growth is moderating.

“The risk is that measures designed to strengthen the system could inadvertently weaken economic growth, consumer sentiment and the propensity for Australians to continue spending.”

That observation was made following the 2017 budget, when it was revealed that APRA’s powers would extend to the non-banks.

Former Pepper CEO Patrick Tuttle told me that such action would “accelerate a credit crunch” and a sharp correction in house prices.

But the stakes are higher now and the risks to mortgage growth have intensified. Customer living expenses are at the centre of this, but I doubt common sense will prevail when it comes to regulation and tighter policies.

Over the last few weeks I’ve spoken to a number of mortgage brokers, head groups and lenders about this issue.

On the record, they see more granular data around living expenses as a positive development. Off the record, they can’t stand the idea and anticipate a significant drop in volume.

One broker put it to me plain and simple: when a person gets a mortgage, they change their living expenses accordingly. They stop spending on rent, reduce their entertainment budget and work harder for that job promotion. In other words, they adapt to their new financial position.

Australians have a solid track record of paying down their mortgages. Arrears rates range from 0.76 per cent (ACT) to 2.5 per cent (WA).

While there have been no systemic problems in the Australian mortgage market, the banking royal commission is doing a great job of promoting a financial services industry rife with misconduct and risky behaviour. Which it is, to some extent, but how risky are the mortgages currently being written?

Are the banks tightening their lending policies because of risks, or is it simply a PR play to appease the regulators and the royal commission?

Either way, we can expect a reduction in credit availability and brace ourselves for what the knock-on effects of that will be.

It’s Time to Unify Financial Advice and Mortgage Broking

The Royal Commission into Financial Services Misconduct has now uncovered evidence of poor industry practice from both the lending camp, including from mortgage brokers, and the financial advice camp. In both cases their forensic analysis revealed cases of consumers being put in the wrong products, charged for services they never received and on fee structures which were hardly transparent.

In addition, some advisers and brokers were restricted by the product portfolios available via their organisations, and ties back to the big banks and other large players were often not adequately disclosed.

But here’s the thing. There are two distinct flavours of regulation in play, despite both being within ASIC’s bailiwick. I believe it is time to move to a unified common set of regulatory standards to cover both credit and wealth domains.

Lending and credit are based on ASIC’s regulations for responsible lending, which requires both a lender, and intermediary – like a broker – to ensure the loan is “not unsuitable”.

This looking at the purpose of the loan, making an assessment of the ability of the consumer to repay, and ensuring it is fit for purpose. What warrants as appropriate steps depends on the nature of the transaction and og the individual capabilities of the customers involved, so it is “scalable”. But that said, they are not obliged to act in the best interests of their client, and fee disclosure is at best rudimentary. Trailing commissions for example are not disclosed. The precise meaning and definition of what is suitable is still subject to case law. But overall, this is weak protection, and as we have seen from the Commission has failed to protect many borrowers. There is nothing here about the best or most appropriate product and it does not include any reference to whole of market analysis. Just, at best “Not Unsuitable”.

On the financial advice side of the house, as is being explored by the Commission currently, under the FOFA rules, advisers must work in the best interests of their clients, disclose remuneration, and their relationship with product manufacturers if appropriate.

This is a whole different set of rules, again regulated by ASIC.  Note again, this does not include finding the best product, or providing whole of market advice. So the rules are slightly stronger, but still incomplete.

Now consider this scenario. I am a property investor who is seeking a mortgage as part of a strategy to build wealth. I will need a life insurance policy also. Who do I talk to? A mortgage broker can assist me with finding a mortgage, but cannot help with life insurance. But if I go and talk to a financial adviser unless they are also a mortgage broker, they cannot assist with the mortgage. And if I find an adviser qualified in both regimes, which rules do they work under?

And that’s the point. The regulations, which by the way are an accident of history in that the responsible lending laws evolved from earlier state legislation, get in the way of providing holistic unified advice.   A consumer has both credit AND other wealth management requirements as part of a single issue. Indeed, there are trade-offs, for example between holding more or less investment properties, versus investing in other market related investment products. Indeed, it is feasible to wrap property investments into an overall wealth strategy.

So I suggest that now is the time to create a new unified set of rules to apply to all financial advisers, whether they are advising on credit or wealth products.  They should be crafted around best interests of their clients, and should mean offering whole of market advice. That means creating an advice plan which spans both investments and lending. The plan should be based on a fee for service, and the advisers’ remuneration should not be in any way linked to a commission or revenue flow from the products they suggest.

Indeed, we should break apart the advice element from the product sale, and application. I suggest that individual product application could be completed by the adviser as part of a fee for service, but they should not receive any additional remuneration related to successful product sales.

This also has implications for ASIC, as it would reshape the advice landscape, but potentially could both simplify the regulatory regime, and strengthen the protection for customers, and help facilitate better customer outcomes. Down the track, advisers would require one set of qualifications, and would be become more recognised professionals.

I believe the current chaotic regulatory environments, which were crafted to appease the finance industry, are in appropriate and the time has come to create a single unified set of regulations. This would assist customers, but would also help the industry on its journey towards professionalism.

FBAA calls for less speculative reporting on broker remuneration

From MPA.

The FBAA has called for “perspective” on broker remuneration amid “unprecedented, unnecessary and crazy” opinions by some ill-informed commentators on the industry.

FBAA executive director Peter White has criticised the number of probes by authorities – including the Productivity Commission, ACCC and Royal Commission – as they `”are falling over each other on their quest for profile.” He also said ASIC itself has only recently conducted a comprehensive review

“I have never seen such craziness around our sector, and this is leading to reactionary comments rather than considered approaches,” he said in a statement.

White pointed out the industry has already been undergoing a process of reform directly with regulators for the past few years to achieve better consumer outcomes.

White believes  “there really is no problem” – It’s just that “these multiple inquiries and statutory bodies have to justify their existence and fat pay packets by kicking someone, and at the moment it’s finance brokers.”

“Let’s keep in mind that consumers are not complaining; we know they are happy with the current system because they are voting with their feet and overwhelmingly choosing brokers,” White added.

White suggests that brokers avoid reacting to quotes coming from bank bosses because their words can easily be edited and used out of context.

He recognizes that banks have raised some eyebrows, but he also points out that their Royal Commission submissions, except for one bank, show support for the existing system. And that doesn’t surprise him because he believes “it’s better for banks, brokers, and borrowers.”

White hopes to hear less speculative reporting, and more rational and informed discussion moving forward.

“The biggest winners of a fee for service would be the major lenders”

From Otiena Ellwand at MPA

Loan Market Chairman Sam White says he’s not surprised that fee-for-service is now being supported as a legitimate way of paying brokers in the future, especially when one looks at who is backing this model.

“The biggest winners of a fee-for-service would be the major lenders who would effectively have a reduction in competition and a massive savings to their distribution costs. If I was running a major bank I’d be asking for the same things,” he said.

During a speech last week, Westpac’s CEO Brian Hartzer said the option of customers paying brokers directly could be considered as a way of making commissions more transparent and helping customers make more informed choices. Although, he did add that “the consequences of such a change for all stakeholders would need to be considered carefully”.

White says he understands the logical appeal of fee-for-service from a regulator’s or a consumer’s perspective, but the consequences of adopting that model could result in reduced competition and a much smaller broking market.

“I don’t think it would spell the end of the broker industry, but I think it would pose significant challenges for how the industry operates today and how we work through those. A lot of work would be needed to work that out,” White says.

ASIC wrote in its submission to the royal commission that flat fee remuneration arrangements exist in the Netherlands and that structure has not undermined the existence of the broking sector.

Lack of hard data and evidence
Smartline wrote in its submission to the royal commission that the commission has not received any direct evidence that upfront and trail lead to poor consumer outcomes besides a self-interested and confidential letter from CBA CEO Ian Narev to Stephen Sedgwick for the Retail Banking Remuneration Review. That letter was cited by CBA executives during their royal commission hearings.

Smartline and Loan Market’s White both pointed to ASIC’s review of mortgage broker remuneration from last year as a better data-driven indicator of the broking market and what issues need to be addressed. ASIC concluded that while certain aspects of remuneration needed to be altered, upfront and trail did not lead to poor outcomes overall.

Smartline published the upfront commission rates and loan volumes of its top 20 lenders in 2015, 2016 and 2017 showing that there is no correlation in the level of commission paid by the lender and the volume of loans directed by brokers to that lender.

White also pointed out that one can just look at the data in the banks’ own loan books.

“By their own admission, their books are ‘healthy’ and mortgage brokers represent over half of those customers. There is a disconnect between the service currently being provided by brokers and the call to move to a fee-for-service,” he said.

Major banks say brokers act for customers, not banks

From The Adviser.

Several major banks have answered a call to clarify where broker allegiances lie, telling the royal commission that brokers act on behalf of customers and are not agents of the banks.

Responding to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’s closing statements, Westpac and Commonwealth Bank of Australia (CBA) have both revealed that they believe brokers act for consumers, rather than the lenders.

In the closing statements, Commissioner Hayne said it would also be of assistance if parties involved in the hearings could seek to answer the question of who a broker acts for.

“It’s a deceptively simple set of questions to ask: who does a mortgage broker act for? You can put it in three ways, I think, and the issue has at least three elements to it. Who does the broker act for? That might be seen as an inquiry about fact or fact and law. Two, who does the customer think the broker is acting for? And third, who does the lender think the broker is acting for? And do you give separate answers at separate steps along the way? If you do, what are the markers that tell you, “I’ve gone from a step where this set of answers is appropriate into the next stage where that set of answers is appropriate”.

“So who does a broker act for, who does the customer think the broker acts for, who does the lender think the broker acts for, are there varying or varied answers at various steps? If there are, what are they?”

In response, Westpac said it was its position that “the broker acts for the customer”.

“Brokers are instructed by and act on behalf of the customers,” the response reads.

“Westpac has direct contractual arrangements with aggregators. Those agreements make it clear that there is no relationship of agency between Westpac and those aggregators.

“Westpac accredits brokers, but the aggregators that Westpac has a contractual relationship with are responsible for managing broker conduct and requirements.”

However, the big four bank said it was “unlikely that customers would think that the broker acts for the lender, rather than for the customer or for themselves as an intermediary or arranger”.

It continued: “The broker’s independence from the lender is one of the things that customers value about brokers (for example, because they offer access to products from multiple lenders).

“To the extent that there is any customer confusion in this regard, such confusion is unlikely to disadvantage any customer. That is because the customer is likely to consider a broker’s recommendation more carefully if they thought that the broker was acting on the lender’s behalf”.

CBA does not consider brokers its agents

Likewise, CBA highlighted that “customers believe that brokers are their agents” and that “customers assess satisfaction with their brokers as if they are their agents”.

It added that “broker firm marketing materials also position brokers as customers’ agents”, highlighting statements from both the MFAA and AFG websites to confirm its position.

Doubling down on its stance, CBA said the evidence put forward to the commission during the hearings “does not establish that CBA regarded an accredited broker as acting as its agent”.

CBA outlined that its agreements describe head groups (i.e. aggregators) as its agents, and then, only in relation to the completion and collection of: customer identification, tax file number disclosure, privacy protection of information forms, and any bank account opening application.

The bank stated: “[A]ccredited mortgage brokers do not act as the agent of CBA. They are authorised by CBA to submit application forms to CBA on behalf of customers who choose to apply for a CBA product.

“When the broker submits the loan application to the lender which the customer has chosen, the broker is acting as the agent of the customer, not as an agent of the lender.”

The bank therefore outlines that its remuneration arrangements with brokers and head groups do not breach its statutory obligations.

“The obligation imposed upon CBA… is an obligation to have adequate arrangements in place to ensure clients are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by CBA or its representatives.

“As brokers are not agents of CBA with respect to the relevant conflict, they are not representatives of CBA, as defined in s 5 of the NCCP Act. Consequently, the obligations under s 47(1)(b) do not apply to broker’s activities, as there is no relevant conflict that arises in relation to credit activities engaged in by CBA or its representatives; only in respect of separate and distinct credit activities engaged in by brokers.”

Question “not capable of a simple answer”

NAB, however, was more guarded in its repsonse.

The major bank said: “This is both a legal and a factual question, which – as posed at the current level of generality – is not capable of a simple answer.

“The answer to this question will depend, in any given case, on matters which are not the subject of evidence presently before the Commission including, amongst other things:

(a) the terms of the relevant contract between the broker and the lender, the broker and the customer, the customer and the lender, the aggregator and the broker, and the aggregator and the lender;

(b) the content of extra-contractual communications between those parties; and

(c) the state of mind of the particular customer and the lender.”

CBA sought to halve broker flows in 2016

From The Adviser.

Confidential internal documents from the Commonwealth Bank show that the bank sought to reduce the proportion of broker flows from around 45 per cent to “between 20 per cent and 30 per cent” in 2016.

According to an internal Reputational Impact Brief that was raised internally in October 2016, the Commonwealth Bank of Australia (CBA) was actively seeking to reduce the number of accredited mortgage brokers who were either inactive or providing very little business.

The document, which has been published by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, outlines that although CBA had approximately 13,000 accredited brokers at the time, only 1,700 wrote the “overwhelming majority” of its loans.

According to the bank, the lower performing mortgage brokers had both lower conversion rates and higher arrears.

It therefore sought to remove approximately 3,198 mortgage brokers from its accreditation (but only ended up revoking the accreditation of 710 brokers on the basis of inactivity).

The brief reveals that this project was part of a “broader piece of work” that sought to effectively halve the number of brokers writing business to the big four bank.

While outlining that the mortgage broking channel represented 45 per cent of its home loan flows in June 2016, the bank said that it was “seeking to reframe the broker strategy with the aim [of] re-balancing flows from the channel to be between 20 per cent and 30 per cent”.

By March 2017, another Reputational Impact Brief outlined that the bank had approximately 12,000 accredited brokers — one thousand less than just six months before.

This second brief revealed that the decision to reduce broker flows was being driven by “pressure from equity analyst and shareholders to re-balance home loan flows in favour of [its] Proprietary Lenders, where [the bank] make[s] a higher margin”.

Around the same time, the bank reiterated this strategy when The Adviser asked CEO Ian Narev whether the bank was moving away from the broker channel.

This was again referenced in the bank’s most recent half-year results (which also showed that broker numbers still account for 40 per cent of new home loan originations), where it stated: “Our strategic focus on improving the home loan experience for customers continued to drive increased lending through the retail bank’s proprietary channels.”

During the hearings for the royal commission, CBA’s executive general manager for home buying, Dan Huggins, clarified: “I think there is a difference between the sales and the proportion. We certainly have a objective to increase the proportion of loans that are coming through the proprietary channels, but I still want to sustain a strong broking channel and, therefore, the sort of dollar sales… I’m comfortable with where they are now but I would like to move the proportions.

“So if I could hold the current level of sales and my broking channel and then grow… the proprietary channel, that would be – you know, that would be part of the objective.”

The bank did concede, however, that it would have been better if CBA had not disaccredited brokers purely based on volume, but instead required inactive brokers to undergo more training in order to ensure the quality of their work.

Indeed, at the end of 2017, the bank announced that it would be bringing in new benchmarks for mortgage brokers “designed to lift standards and ensure the bank is working with high-quality brokers who are meeting customers’ home lending needs”.

The accreditation crackdown meant that brokers would need to fulfil more requirements, including having at least two years’ experience and hold “at least” a Diploma of Finance and Mortgage Broking Management. The bank has also since amended the way it segments its accredited brokers, bringing in a new, two-tier system: elite broker and essential broker.

Narev’s “confidential” letter to Stephen Sedgwick

As well as reducing broker numbers, the royal commission has revealed that the bank’s CEO was supportive of changes to broker commission.

The royal commission has now released the full contents of a confidential letter written by outgoing CEO Ian Narev to Stephen Sedgwick AO, as the latter was undertaking his review into retail banking remuneration.

As covered in The Adviser’s sister publication, Mortgage Business, the CBA CEO told Mr Sedgwick that he believed broker commissions were conflicted and suggested extending FOFA to include the mortgage industry.

“As the Reviewer identifies, the use of upfront and trailing commissions linked to volume can potentially lead to poor customer outcomes,” Mr Narev wrote.

He added: “A move to a flat-fee payment would enable brokers to be agnostic towards loan size and leverage. However, consideration is needed on the payment amount, on how to link the fixed payment to an underlying security rather than a product (i.e. to avoid unintended incentives to split loans into multiple fixed/variable products), and on appropriate ‘clawback’ periods to dis-incentivise the churning of loans to maximise broker income.

“A move to flat-fee could also consider the removal of ‘trail commissions’ which can encourage brokers to suggest slower paydown strategies (e.g. interest-only) that maximise broker trail commission income.”

Mr Narev added that any changes to volume-based commissions would also “need to be made uniformly across the industry and across both proprietary and broker channels to eliminate bias and avoid significant market disruption”.

Mr Narev concluded: “We agree with the Reviewer’s observations that while brokers provide a service that many potential mortgagees value, the use of loan size linked with upfront and trailing commissions for third parties can potentially lead to poor customer outcomes.

“Mortgages also sit outside the financial advice framework, even though buying a home and taking out a mortgage is one of the most important financial decisions an Australian consumer will make. We would support elevated controls and measures on incentives related to mortgages that are consistent with their importance and the nature of the guidance that is provided. For example, the de-linking of incentives from the value of the loan across the industry, and the potential extension of regulations such as Future of Financial Advice (FOFA) to mortgages in retail banking.”

RBA supports best interests duty for brokers

From The Adviser.

The Reserve Bank of Australia has revealed that it believes all brokers should be required to act in a consumer’s “best interests”.

In its response to the Productivity Commission’s draft report into competition in the Australian financial system, the RBA came out in support of several of the commission’s draft recommendations.

Notably, the central bank revealed that it was in support of the draft recommendation that the Australian Securities and Investments Commission impose on lender-owned mortgage aggregators (and the brokers that operate under them) a “clear legal duty” to act in the consumer’s best interests.

Further, the RBA called for such a duty to be extended to all brokers, not just those operating under lender-owned aggregators.

The bank’s submission reads: “The bank supports the draft recommendation to require lender-owned aggregators and the brokers who operate through them to act in consumers’ best interests… We would support extending this to all brokers.

“While there may be some benefit in enhancing mortgage broker disclosure requirements to consumers to improve transparency, it is important to recognise that some consumers may nonetheless still not fully understand the information provided (given its complexity and the backdrop of consumers not taking out a mortgage frequently).

“Steps to address the underlying conflicts of interest and misaligned incentives are therefore crucial to improving consumer outcomes.”

Further to this, the RBA pulled on several findings from ASIC’s remuneration review, highlighting a number of other factors that it believes “inhibit the effectiveness of competition through mortgage brokers”.

These included:

  • Smaller lenders find it harder to get onto aggregator panels due to fixed costs
  • Brokers need to be accredited with a particular lender to sell their loans and they have incentives — “partly due to variations in commissions and the burden of seeking accreditation” — to concentrate their recommendations on a small number of lenders rather than the whole panel of potential lenders
  • Lenders “may compete on their incentives to brokers, rather than on the quality of their loan products, creating competitive barriers for smaller lenders who find it too costly to offer such incentives”
  • Higher commissions for brokers “may also drive up costs for consumers”

The RBA said that it is therefore in support of “enhancing” the transparency of mortgage interest rates paid by borrowers.

It suggested that possible ways of doing this could include “asking the banks to publish these rates directly” or “conducting a survey of the largest mortgage brokers to obtain representative rates”.

The RBA made several other statements in its submission, including:

  • The bank agrees that, when formulating prudential regulatory measures, it is important that any potential effects on competition be considered
  • It did not believe that the setting of the cash rate either constrains competition or substantially facilitates price co-ordination (as had been suggested by the PC)
  • The bank supports the commission’s draft recommendation to make risk weights “more sensitive to risk”
  • It did not recommend excluding warehouse loans to non-ADIs from the scope of Prudential Standard APS 120 as it “opens the possibility of regulatory arbitrage by treating loans of identical risk differently depending on who the ultimate lender is”
  • The RBA agrees that a review of the regulation of Purchased Payment Facilities “would be desirable” and that a tiered prudential regime is “likely to be appropriate”
  • It agrees with the commission’s draft recommendation that merchants should be provided with the ability to determine the default network for contactless transactions using dual-network cards

Would A Loan Comparison Tool Compete With Brokers?

From The Adviser.

A loan comparison tool proposed by the Productivity Commission could compete with the broker channel, according to six of Australia’s largest non-major banks.

In a joint submission to the Productivity Commission (PC), AMP, the Bank of Queensland, Suncorp, Bendigo Bank, MyState and ME Bank warned that an online loan comparison tool could undermine the broking industry.

In its draft report, the PC called for the Australian Prudential Regulation Authority (APRA) to collect interest rate and fee data and use it to determine a median rate that would be published via an online tool.

The PC claimed that such a reform could help increase transparency for customers and enhance competition.

The non-majors claimed that a proposed comparison tool with the “authority of a government agency” could undermine the broker channel.

“[The] online tool would, in some respects, compete with the broker channel, particularly given the proposal is for the comparison tool to have the authority of a government agency standing behind it,” the banks stated.

“Such an approach could potentially undermine the broker industry and eventually favour the banks with larger bricks and mortar networks,” the banks added.

Further, the lenders argued that the publication of a median interest rate could “mislead customers”.

“While this has the potential to improve competitive pressure from the demand side of the market, it may also involve considerable practical difficulties,” the submission read.

“More importantly, it may mislead customers as to the true cost of a product. The main problem with such tools is that they have a tendency to lead to ‘gaming’, whereby suppliers develop products that rate well on the tool but have shortcomings in other areas.

“For example, comparison tools have difficulty capturing the full benefits of a ‘bundle’ of services offered by a financial institution.”

The banks claimed that the tool could also create an incentive for some lenders to “shift costs” to products and services outside the tool’s scope.

“They also provide an incentive for suppliers to increase costs for services outside the scope of required disclosures. For example, in the case of mortgages, suppliers could shift costs to account closing or switching fees,” the submission said.

Additionally, the banks claimed that the tool could instigate a “race to the bottom”, with lenders creating products that “fall short of expectations”, potentially requiring regulatory intervention.

The lenders said: “[Some] financial institutions may respond by choosing not to offer services outside what the tool requires, and consumers could end up with products that fall short of expectations.

“Such an approach could see suppliers in a race to the bottom, offering only the most basic and feature-free products in order to present the most attractive median interest rates to the comparison tool.

“This would then inevitably result in additional regulatory interventions as governments attempt to patch over the shortcomings of the tool.”

Broker remuneration

Moreover, the banks advised against changes to the broker remuneration model, claiming that “consumers have a strong tendency to resist paying for services”.

The lenders added that “disruption” to the broking industry’s remuneration model could have a “material” impact on market competition.

“A significant disruption to the economic viability of the broker industry would be a material competitive neutrality issue for smaller banks.”

“Disclosure of mortgage broker ownership is a priority”

In their submission, the banks also expressed support for the PC’s call for increased disclosure for mortgage brokers.

The non-majors noted that they believe customers should “know the identity of the broker’s owner”, and they claimed that the level of business activity directed to an aggregator’s owner or associated company should also be published.

“[We] believe it is important to ensure that the customers of mortgage brokers know the identity of the broker’s owner so they can factor this information into their decision-making process.

“In addition to ownership disclosure, [we] recommend that broker networks and aggregators publish information showing the amount of business directed towards their owners or associated companies, relative to the proportion directed elsewhere.”

ABC The Business Does Mortgage Brokers

A brief segment on Thursday’s programme discussed the Royal Commission in Financial Services Misconduct examination of the mortgage broking industry.

The segment highlighted the significant fees, and the risks of misaligned incentives.

Questions over just who’s interest mortgage brokers act in have reverberated through the $50-billion industry. The broking industry has hit back insisting the customer comes first.