Tag: The Adviser

APRA’s actions will reduce borrowing power

From The Adviser.

The banking regulator has swapped one lending curb for another as Australia’s lending crackdown continues. But new debt-to-income curbs could see many priced out of the property market.

At first glance, it would appear that APRA has reopened the floodgates for banks to turbocharge lending to property investors after announcing that its 10 per cent benchmark will be removed.

Price was the natural lever for the banks to pull when the 10 per cent cap came into play four years ago, and the banks have no doubt profited from the regulator’s actions.

What brokers and their customers will now be waiting to see is whether the removal of the cap will cause banks to lower their rates. Four years is a decent amount of time, but not too long to forget that many of the banks used APRA’s 10 per cent cap as an excuse to hike rates multiple times since 2014. Without the cap, it would make sense for them to begin reducing rates. That is, of course, if their interests are aligned to their customers’. Unfortunately, as the Hayne royal commission is discovering, listed mortgage providers also have shareholders to satisfy and profits to make.

APRA isn’t simply scrapping its cap on investor loan growth — it is doing so on the proviso that the banks “maintain a firm grip on prudence of both policies and practices”. Failure to do so will see the 10 per cent benchmark continue to apply.

Confident that the 10 per cent cap has “served its purpose”, APRA is now training looking at Australia’s ballooning household debt woes.

With investors suitably calmed, the regulator wants to ensure that banks don’t go crazy and start lending to people who are leveraged to the hilt.

APRA chairman Wayne Byres explained that, with the 10 per cent cap now gone, ADIs will be expected to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers.

“This provides a simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for,” the chairman said.

This will most likely come in the form of loan-to-income (LTI) limits, similar to those that regulate the UK mortgage market.

Some Australian banks have already started reducing how much people can borrow. For example, late last year NAB announced that its LTI ratio would be capped at 8. In February, this was tightened to 7, meaning that a person earning $100,000 can only borrow a maximum of $700,000.

The monthly mortgage repayments on a $700,000 P&I mortgage (25-year term) at a variable rate of 5.24 per cent are $4,191.

A person earning a gross income of $100,000 (not including superannuation and provided they don’t have any student debt) receives an after-tax monthly income of around $6,100.

This means that more than two-thirds, or 68 per cent, of their take-home pay will go to mortgage repayments.

While lenders are likely to reduce their LTI ratios in accordance with APRA’s new guidelines, there is only so far they can go before borrowers are forced out of expensive markets like Sydney, where the average house price is $1.15 million and the average unit sells for $740,000.

At these prices, it’s hard to see a mortgage under $700,000 doing much for a Sydney home buyer. Particularly when the average Sydney household earns $91,000 a year (ABS 2016 Census of Greater Sydney). An increased focus on living expenses will also no doubt see borrowing power further impacted.

‘Flawed’ mortgage lending could trigger risk

From The Adviser.

Revelations of “flawed” lending practices uncovered by the royal commission could expose the property market to higher levels of risk, according to a research group.

RiskWise Property Research CEO Doron Peleg has claimed that the “flawed” provision of income and expense information identified by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry could have an adverse effect on the Australian housing market.

“The banking royal commission has found the current processes for ensuring prospective home loan customers provide true information regarding their incomes, expenses and debts are flawed,” Mr Peleg said.

“This includes the details that are gathered by mortgage brokers, who generate about 50 per cent of the loans, regarding the living expenses customers provide in their home loan applications.”

Mr Peleg pointed to moves by the major banks to increase scrutiny on income and living expenses, making particular references to changes introduced by Westpac which require brokers to capture all living expenses under 13 categories.

The CEO claimed that such measures could lead to a sharp decline in lending activity.

“In the short term at least, this is likely to result in a lower volume of loans, as seen in the UK which had a 9 per cent drop in volume as a result of the 2014 Mortgage Market Review (MMR) to address lax lending standards,” the CEO continued.

“It is also likely that the duration to approve loans will be significantly increased, and significant reduction is projected in borrowing capacity (as per UBS, house borrowing capacity could be cut by 21 per cent to 41 per cent, depending on the borrowers’ income).”

Mr Peleg alleged that high-risk properties, which appeal to investors, would be most susceptible to a price correction if tightened lending standards are introduced.

“Investors often use creative financial planning, and they often place strong reliance on cash flow and negative gearing. Therefore, further scrutiny on property investors is likely to significantly reduce their borrowing capacity, and this will mean demand for such properties will be reduced,” the CEO added.

Further, the RiskWise executive noted that the higher-end property market would not be immune to such risks and could also be exposed to price correction.

“[Unaffordable] areas and properties at the top end of the market also carry a higher degree of risk, as many borrowers need to rely on the current borrowing capacity to purchase these properties.”

However, Mr Peleg noted that he expects capital cities experiencing strong economic and population growth, with properties that appeal to both owner-occupier investors, would be more likely to avert such risks.

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.”

Fees for service would only benefit major banks: AFG

AFG, a major Mortgage Broker Aggregator says that introducing fees for service would cause a “major disruption” in the finance industry, be a “clear disincentive” for borrowers to use brokers and “further entrench the oligopoly powers of the major banks”, in a response to the Productivity Commission, as reported by The Adviser.

In its response to the Productivity Commission’s (PC) draft report into competition in the Australian financial system, the Australian Finance Group (AFG) responded to the call for more information on the effect of replacing broker commissions with a fee-for-service model.

The group pulled no punches in warning that the introduction of such a model would “provide a clear disincentive for consumers to use brokers and would inevitably cause a major disruption in the finance industry”.

“The four major banks would be the only beneficiaries of a change of this kind as they would gain an additional competitive advantage over competing lenders that do not have extensive direct distribution channels,” the broking group said.

“This would further entrench the oligopoly powers of the major banks, which, coupled with the commission’s observations concerning the regulatory advantage of D-SIBs, ha[s] a negative impact on competition in the finance sector and [will] lead to a loss of the pricing benefits that resulted from the development of the mortgage broking industry.”

AFG also predicted that should such a change occur, it would not necessarily mean that any savings would be passed on (i.e. that loans would be repriced or that consumers would save money), as banks would have to distribute their products and would have additional costs (including increased staffing) “to deal with direct applications that have not been professionally compiled and pre-assessed by a broker to meet the lender’s requirements”.

“It is AFG’s contention that the presence of the mortgage broking channel is one of the few drivers of competitive tension in the Australian lending market,” the response reads.

“A consumer dealing directly with a lender has limited negotiating power or knowledge of the interest rates and lending criteria offered by competitors. A mortgage broker with access to a panel of lenders drives competition between lenders to the benefit of all consumers, not just their own clients.”

Touching on trail, AFG said that it “strongly supports” the removal of trail that increases over time, but that it does not agree that the standard trail commission operate as a disincentive to switching.

It said: “When a broker assists a consumer to refinance, trail commissions that cease with respect to the repaid loan will be replaced with the trail commissions payable on the new loan. As a result, it is AFG’s view that, in the absence of increasing trail commission rates over time, trail commissions per se are not likely to have a negative impact on broker behaviour.”

It concluded: “It is important that any changes should not result in an economic drift away from the broker to the lender, as devaluing the service provided by brokers would have significant and long-term detrimental effects for consumers by lessening the competitive tensions that currently exist in the credit industry.

“It is essential that anticompetitive conduct is not permitted to proliferate under the guise of regulatory reform.”

Best interests duty

In regard to the PC’s suggestion that a duty of care be implemented on lender-owned aggregators to act in the consumer’s best interests, AFG said that it was “very concerned” about introducing a test that would be applied to only one section of the industry “as it is likely to result in market distortions and unintended consequences”.

For example, it suggested that lender-owned aggregators could suggest that consumers are at risk if they use a broker that is not subject to the same test (and assert that the safest course for consumers is to only use brokers that are subject to the additional “best interests duty”).

Noting that the Combined Industry Forum has been working on a reform package, AFG added that “before considering additional law reform proposals, sufficient time must be allowed for those proposals to be implemented and embedded into the processes, procedures and culture of individual broker businesses”.

“Once that has occurred, it will be an appropriate time to again review the extent to which community expectations are met and good consumer outcomes are achieved,” the group said.

Lack of data on costs “disingenuous”

Noting that the commission found it difficult to ascertain from lenders the costs and benefits of using brokers rather than branches to source home loans, AFG said that the lack of information from lenders “should be considered to be disingenuous”.

“It is difficult to accept that entities that are sophisticated enough to develop and manage banking products and meet complex legal and regulatory obligations do not have information about product costs that would be needed to price those products,” the group said.

“However, absent a willingness to publicise that information, AFG submits that the willingness of lenders to embrace broker distribution should be considered reasonably reliable evidence that brokers provide an efficient and cost-effective means of distributing lending products.”

It added: “Brokers provide a variable cost base for lenders, with payment only required when a loan is settled and while it remains undischarged and not in default. This means that the risk of non-completion by a prospective borrower is substantially borne by the broker. As a result, lenders using broker distribution (as opposed to fixed-cost branch networks) can more easily price loans in a way to ensure that they are profitable.”

AFG also outlines that it believes ASIC should be responsible for advancing competition in the financial system, that consumers would receive “an inferior standard of service” should financial advisers also offer credit advice, and that ASIC could produce a best practice guide on disclosure requirements.

‘No evidence’ that brokers limit switching: NAB

NAB, the owner of three of the larger mortgage aggregators, says Broker-originated loans are refinanced at “more than double” the rate of direct-channel loans in its new submission to the Productivity Commission; reports The Adviser.

In its second submission to the Productivity Commission (PC), released on Wednesday (21 March), the National Australia Bank (NAB) stated that it has found “no evidence” which suggests that the payment of trail commission has limited “switching” for broker-originated loans.

The big four bank responded to draft finding 13.1 of the PC’s draft report, which alleged: “The payment of trail commissions creates perverse incentives for brokers by rewarding them for keeping customers in their existing loan. Broker loyalty appears skewed towards the institution, not the customer, and thus likely discourages refinancing.”

In its submission, NAB noted that in the 2017 financial year (FY17), switching was more prevalent among borrowers with broker-originated loans.

“NAB has no evidence that incidence of switching is lower for mortgage broker-originated borrowers compared to those originated via direct channels,” the submission reads.

“In fact, refinance out rates for NAB’s mortgage broker-originated loans was more than double the rate of direct channels in FY17.”

The submission echoed the views put forward by NAB COO Anthony Cahill in his address to the PC on 5 March, stating that brokers are, in fact, rewarded for refinancing a client’s loan.

“[If] a broker were to assist a customer to move the loan to another lender, they would cease receiving a trail commission from the incumbent, but earn upfront and trail commission from the new lender.”

Further, the bank reiterated its view that trail commissions are paid as an incentive for brokers to “service customers on an ongoing basis” (which PC chair Peter Harris has questioned recently).

NAB highlighted the work the Combined Industry Forum was doing to improve commission structures and raise standards.

NAB concerned over “best interests duty”

The PC has also suggested that the Australian Securities and Investments Commission (ASIC) could impose a legal duty of care obligation on brokers and called for increased broker disclosure requirements.

In its submission, NAB said that a best interests duty “may be difficult to achieve practically” as “both mortgage products and customers themselves are not homogeneous and price is not the sole determinate of a good customer outcome”.

NAB added that it was “concerned” that applying a legal best interests duty only to brokers operating under lender-owned aggregators would create an “uneven playing field”.

The bank reiterated that bringing in a fee for service would be “detrimental to competition in the mortgage market” as it would see brokers “become unaffordable for customers”.

NAB also pointed out that proposals have already been put forward by the Combined Industry Forum (CIF) to improve broker and aggregator transparency.

The major bank also said that it does not believe the publication of median interest rates would benefit consumers, as it would “create unreasonable expectations, whereby all consumers anticipate receiving an interest rate at or below the median”.

“There are legitimate, risk-based reasons for customers to receive a price that is above a median rate; for example, high-risk loans require significantly more capital compared with low-risk loans, necessitating a different price strategy,” the major bank said.

Commissioner suggests trail could be paid to borrowers

From The Adviser.

The chairman of the Productivity Commission has restated his concern regarding the payment of trail commission, warning that “someone is going to have to deal with this question of commission”.

Despite ASIC’s remuneration review finding that ongoing trail “usually provides an incentive to aggregators and brokers to put forward higher-quality loans where consumers are less likely to default on their obligation”, and despite several industry figures — including FBAA head Peter White, MoneyQuest managing director Michael Russell and National Australia Bank CEO Antony Cahill — giving evidence at the public hearings last month of the benefits and necessity of trail commissions, the PC’s chairman suggested that trail could instead be paid to borrowers.

Speaking at ASIC’s Annual Forum on Tuesday (20 March), Peter Harris argued that he had not been convinced that trail commission benefits customers.

He told delegates that while the commission “didn’t make a clear statement saying they’re rotten and evil”, they do believe that trail commissions are “quite odd”.

“[It] is purported to be the case that [trail commissions] are either paid by the banks in order for the broker to look after you during the period of the loan. But when we ask the banks, ‘Are there any performance standards that go with this in return for your money? Have you asked them if they’ve spoken to the customer in the last 12 months?’, the answer generally appears to be ‘no’.

“[There’s] a good chunk of money out there paying for service for which there is no performance standard, which is an interesting development. The other rationalisation is [that] it’s there to stop churn.”

However, Mr Harris stated that there was “conflicting evidence” given surrounding churn.

“In some cases, exactly the same broker representative who told us that churn wasn’t relevant [was] in a public statement, on record, saying it was exactly the reason why [brokers are] getting these payments,” the chairman said.

“Somewhere, someway, someone is going to have to deal with this question of commission.”

Remarkably, Mr Harris suggested that instead of banks paying brokers trail commission, the payment could be made direct to a borrower.

He said: “There are alternatives into the idea of a [trail] commission paid to a broker. The average $665 a year payment could be paid to the consumer not to switch loans,” Mr Harris suggested.

The commissioner noted that the final draft of the Productivity Commission’s report (due in July) is likely to address the impact that trail commission has had on competition.

“Has the revolution been captured by the establishment?”

Mr Harris also suggested that while brokers may have disrupted the mortgage market, he questioned who now held the most market power.

“The question is who’s exhibiting the market power? That is the most important issue,” Commissioner Harris said.

“There are a number of potential suspects starting from, of course, the banks themselves, but equally it is possible that mortgage brokers themselves have substantial market power in this marketplace.

“[What] are [brokers] doing today with that particular power? [I] think a number of people haven’t focused on [that] in exactly the way we would in a competition inquiry. We would say: ‘Gee, that’s interesting, these banks don’t appear to be able to push back on the brokers’.”

Commissioner Harris referred to testimony made by the major banks to the financial services royal commission and suggested that the banks’ ability to “re-determine payment arrangements in the customer’s best interests” has been diminished by the broking industry’s increased market share.

“Even the Commonwealth Bank can’t act on its own, which is an astonishing reflection of apparent market power,” Mr Harris said in reference to the bank’s appearance before the royal commission.

Mr Harris acknowledged the role that the “broker revolution” played in enhancing competition when the industry first emerged, but he questioned whether brokers still work in the best of interest of customers.

“Brokers are potentially wonderfully competitive forces. The question is, has the revolution been captured by the establishment?” the chairman said.

Mr Harris asked: “After 20 years, has this degree of change now being turned around from being a potential benefit to consumers to being potentially acting somewhat against their interest and that is clearly within scope for us — that is a competition issue.”

The Productivity Commission’s draft report was widely criticised by the broking industry, with the associations calling some of its views on broking “limited”, “amateur” and — in some cases — “nonsense”.

ANZ and NAB Cuts Mortgage Rates

From The Adviser.

Two major banks have announced rate cuts of up to 50 basis points to their fixed rate home loan offerings.

ANZ Bank and the National Australia Bank are the last of the big four to announce cuts to their fixed rates, following similar announcements from the Commonwealth Bank and Westpac.

NAB has dropped its five-year fixed rate for owner-occupied, principal and interest home loans by 50 basis points, from 4.59 per cent to 4.09 per cent.

The bank has also reduced its fixed rates on investor loans by up to 35 basis points, with rates starting from 4.09 per cent.

As of Friday (9 March), ANZ also dropped fixed rates on its “interest in advance”, interest-only home loans by up to 40 basis points, with rates starting from 4.11 per cent.

Further, fixed rates on its owner-occupied, principal and interest home loans have fallen by 10 basis points, with rates now starting from 3.99 per cent.

RateCity money editor Sally Tindall believes that the rate movements have been influenced by the banks’ cash rate expectations.

“The fixed rate war shows our big banks are not pricing in a rate hike anytime soon,” Ms Tindall said.

“The series of cuts show competition has returned to the investor interest-only space. After reaching their caps imposed by APRA, the big banks are opening up their books again.”

Ms Tindall noted that the changes would be welcomed by borrowers seeking financial stability.

“This is good news for people in the market who are looking for the financial security fixed rates can bring.”

Ms Tindall concluded: “Five years without having to worry about a rate hike is the kind of peace of mind a lot of home hunters are looking for.”

Brokers expect to write more non-conforming loans

From The Adviser.

Mortgage brokers believe that tighter prime lending policies and changing customer needs will drive up demand for non-conforming mortgages over the next 12 months, according to new data.

A Pepper Money-commissioned survey of 948 mortgage brokers has revealed that 70 per cent expect to write more non-conforming loans in the coming year, while 66 per cent predict a decline in the number of prime loans written.

Surveyed respondents expect the demand for non-conforming loans to rise as a result of tighter prime lending criteria (22 per cent), changing customer needs (21 per cent) and changing legislation/regulations (13 per cent).

“The survey shows clearly there is a greater awareness and understanding of non-conforming loans among brokers,” Pepper Group’s Australian CEO, Mario Rehayem, said.

“Brokers and consumers no longer see non-conforming loans only for people who’ve experienced a credit event; instead they realise they are a valid alternative for consumers who are self-employed, who generate income outside of normal work scenarios, are seeking investor loans or have a high LVR.”

The CEO believes that brokers are servicing increased demand from Australians for flexible lending alternatives.

Mr Rehayem said: “With the big banks tightening their lending criteria on an almost daily basis, they are excluding a whole segment of credit-worthy ordinary Australians from accessing finance. That’s why more brokers are discovering the benefits of a flexible lender with a consistent approach to credit provision.

“We also know more Australians are working for themselves or on a part-time basis, and brokers are looking to provide their growing self-employed customer base with suitable lending options.”

Moreover, the survey found that the number of brokers who have yet to write a non-conforming loan has also reduced, falling by 6 per cent from 18 per cent in 2016 to 12 per cent in 2018.

“We know brokers who have previously written a non-conforming loan for a customer are more comfortable in recommending them in the future, that’s why we have established ourselves as a leader in broker education and the provision of tools that allow them to confidently recommend a non-conforming loan in the future,” Mr Rehayem concluded.