Detailed Response

Please see attached specific detailed comments:

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1. The Royal Commission

2. The Royal Commission’s Recommendations

3. Why Commissioner Hayne made these Recommendations

4. The “Netherlands Model”

5. Current Broker Remuneration

6. Premium Broker’s Disclosure of Commission

7. Why the Recommendations are Bad for Clients

8. What this Potentially Means for You as a Client?

9. What will be the Increased Costs to Refinance?

10. What about the Rest of the Recommendations?

11. How the Share Market Reacted

12. Our Goal – to continue providing our clients with Premium Service

13. Sign our petition

14. More information

 

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:

1. Credit Guide - broadly outlines that we receive commission

2. Credit Quote & Proposal – outlines the amount of commission we receive and is signed by every client

3. 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.