Premium Broker’s Response to The Royal Commission (RC).
On Monday 4th Feb 2019, Commissioner Hayne handed down his Report & Recommendation into Misconduct in the Banking, Superannuation and Financial Services Industry.
The Royal Commission’s recommendations about Mortgage Brokers was in response to Commissioner Hayne’s view that the way brokers get paid (by the Lender) conflicts with acting in the best interest of the consumer. He has therefore recommended removing broker’s commission and replacing it with a Consumer Pays Fee. The new fee will be charged by both the Broker and the Lender. Either option will result in the client paying a new fee.
If this recommendation is adopted, we believe Premium Broker will need to charge an upfront fee of approximately $4,000, whereas the Lender’s fee may be $1,500.
Whilst the recommendations are designed to benefit consumer outcomes, we believe they will have a detrimental effect on the Australian banking industry and you the client:
Consumers will pay more
Lenders will obtain additional fee income
There will be a reliance on banks to pass on interest rate reductions
The Broker market will be wiped out
Consumers will be forced back into the branches for Mortgage Advice
Large Banks (i.e. the big 4) with large branch networks will benefit
Smaller Lenders will struggle with distribution
Large Banks will increase market share
Lower competition will result in higher interest rates & higher margins & bigger bank profits.
The model is based on the Netherlands Model, which has tax deductions for the Fee for service application fee & interest over the life of the loan. It has already resulted in the closure of 50% of their banks and the larger banks have been held liable for undercutting their Mortgage Advice Fees in order to gain market share.
Greed is not good
The recommendations offer an even bigger opportunity for the Big 4 Banks and this is not good for the average Australian.
“One of the first things you learn as a child is not to be greedy.
Yet, greed is the ultimate culprit identified by Justice Kenneth Haynes in his banking royal commission report.” Ebony Bennet SMH 09/02/2019
Please see attached specific detailed comments:
The Royal Commission
The Royal Commission’s Recommendations
Why Commissioner Hayne made these Recommendations
The “Netherlands Model”
Current Broker Remuneration
Premium Broker’s Disclosure of Commission
Why the Recommendations are Bad for Clients
What this Potentially Means for You as a Client?
What will be the Increased Costs to Refinance?
What about the Rest of the Recommendations?
How the Share Market Reacted
Our Goal – to continue providing our clients with Premium Service
Sign our petition
1. The Royal Commission
On Monday 4th Feb 2019, Commissioner Hayne handed his Report & Recommendation into Misconduct in the Banking, Superannuation and Financial Services Industry.
There were some good outcomes from the 76 Recommendations however the recommendations pertaining to Mortgage Broking Industry where unexpected and upon review devastating for our industry and our clients.
2. Royal Commission’s Recommendations
You can read the full report and recommendations on the government’s website https://www.royalcommission.gov.au
Below are the recommendation that affect the Mortgage Broking Industry
Recommendation 1.2 Best interest duty
The law should be amended to provide that, when acting in connection
with home lending, mortgage brokers must act in the best interests of
the intending borrower. The obligation should be a civil penalty provision.
Recommendation 1.3 Mortgage broker remuneration
The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.
Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders.
[Sadly, this recommendation goes against detailed research and reviews on mortgage brokers by ASIC, the Australian Banking Association and the Productivity Commission]
Recommendation 1.4 – Establishment of working group
A Treasury-led working group should be established to monitor and, if necessary, adjust the remuneration model referred to in Recommendation 1.3, and any fee that lenders should be required to charge to achieve a level playing field, in response to market changes.
Recommendation 1.5 – Mortgage brokers as financial advisers
After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
Recommendation 1.6 – Misconduct by mortgage brokers
ACL holders should: be bound by information-sharing and reporting obligations in respect of mortgage brokers similar to those referred to in Recommendations 2.7 and 2.8 for financial advisers; and take the same steps in response to detecting misconduct of a mortgage broker as those referred to in Recommendation 2.9 for financial advisers.
3. Why Commissioner Hayne made these Recommendations
Commissioner Hayne identified that the commission paid to brokers is conflicted. He surmised that because brokers were being paid by the Lenders, the broker’s best interest was aligned with the Lender. This was therefore conflicted because the broker should be acting in the best interest of the Consumer.
Like every industry there were an extremely small number of brokers who took advantage of this situation.Premium Broker agrees that these brokers should not be in our industry and every attempt to remove them and their incentives should be removed.So, whilst Commissioner Hayne’s comments are correct, his recommendations are seriously flawed.
4. The Netherlands Model
The recommendations are loosely based on the “Netherland’s Model”.
The Netherlands has a completely different banking & taxation system. Owner Occupied clients receive tax deductions for the Mortgage Fees. Competition has halved. It has already resulted in the closure of 50% of their banks. Their larger banks have also been held liable for undercutting their Mortgage Advice Fees in order to gain market share.Similar to our industry their banks cannot be trusted.
5. Current Broker Remuneration
Most Lenders currently pay brokers:
UPFRONT COMMISSION: Between 0.50% and 1.0% (vast majority are 0.65%)
TRAIL COMMISSION: Between 0.00% to 0.25% (vast majority are 0.15%)
Other Commission such as volume-based incentives have been banned for the last few years, these were never paid to individual brokers just our aggregation company Vow Financial Pty Limited, a fully owned subsidiary of Yellow Brick Road Holdings Limited.
6. Premium Broker Disclosure of Commission
Premium Broker and all brokers are legislated to fully disclose the amount of commission we receive. We are diligent in this process and get our clients to sign statements of disclosure. Namely we provide the following:
Credit Guide - broadly outlines that we receive commission
Credit Quote & Proposal – outlines the amount of commission we receive and is signed by every client
Lenders Loan Agreement – the Lenders Consumer Credit Contract is signed by every client and outlines the amount of commission we receive.
7. Why the Recommendations are Bad for Clients
Recommendation 1.3 relates to brokers remuneration, how we get paid and removing commission. Fundamentally the Royal Commission Recommendation is for Mortgage Brokers to move away from their current commission model to a consumer pays model.
CURRENT MODEL: Lenders Pays the Broker
PROPOSED MODEL: Consumer Pays the Broker
Whilst the recommendations are designed to benefit consumer outcomes, they will do the opposite:
•Consumers will pay more
•Lenders will obtain additional fee income
•Broker market will be wiped out
•Consumers will be forced back into the branches for Mortgage Advice
•Large Banks (ie the big 4) with large branch networks will benefit
•Smaller Lenders will struggle with distribution
•Large Banks will increase market share
•Lower competition will result in higher interest rates
8. What this potentially means for you as a client
Commissioner Hayne identified the If you were looking for a loan you will need to obtain Mortgage Advice from a mortgage professional.You would need to pay either the Lender directly or a broker in the form of a Mortgage Advice Fee (ie a Consumer Pays Fee).This is no different to the choice you have now.
*Commissioner Hayne has said that a Lender would need charge the client specifically he wrote on page 79 of the report:
“. . . banks should be required to charge a fee to direct customers based on the costs that are incurred by the bank when there is no broker. I recognise that suggesting that banks charge an additional fee will be difficult for some to understand. But, if brokers are to charge a fee for their services, then it may be necessary for the purposes of maintaining competition, for banks also to be required to do so when directly originating a loan. The fee should reflect when originating a loan without the assistance of a broker.”Royal Commission Report – Page 79
9. What will be the increased costs to refinance?
In 2011 the Labour Government announced the Australian Banking Reforms. The first recommendation, a good one, was adopted by the Labour Government:
To ban mortgage exit fees from 1 July 2011
Purpose - to boost competition by giving consumers greater freedom to walk down the road and get a better deal.
If Labour adopts the Royal Commission’s recommendation of a Consumer Pays Fee they will simply undo a good policy they made in 2011.
10. What about the rest of the recommendations?
In general, Premium Broker agrees with the rest of the Royal Commission’s Recommendations as we don’t believe they differ from what we already do. Namely, we believe that we have always hold our clients interest first, that we are already moving towards a full advice model similar to Financial planners and misconduct by brokers should be dealt with severely.
11. How the Share market reacted
Professional investors realise the recommendations were good for the big banks and bad for mortgage brokers. Here are two graphs showing the shares prices of AMP (a large financial institution with a banking licence and AFG (Australia’s largest Mortgage Broking Aggregator) the day after the RC announcement.
Major banks experienced a 10% increase in their share prices.
Aggregators experience a 30% drop in their share pricess.
12. OUR GOAL – to continue providing our clients with Premium Service
At Premium Broker our goals remain unchanged. We put our clients first and will continue to do so. As far as our clients are concerned it should be business as usual. We will continue to be here for you.
Review your loan today - if you really want to help. Call us and ask us to review you loan.
We already have a program in place to review everyone's loan however if you are concerned your rates are too high. Give you broker a call and ask for a loan review. We would love to help.
13. Sign the Petition
If you want to help our cause - we would greatly appreciated going online and signing our petition to submit to goverment.
Thanks for you help w