Judging by his Final Report, one could be forgiven for concluding that Commissioner Hayne has little confidence in the common sense and good judgement of the average Australian.
He seems to proceed from a belief that – even when presented with all the required information – people are incapable of making the right decisions for themselves and must be protected by the state.
Sensible consumer protection measures are required, but these have been in place since the introduction of major reforms through the NCCP Act in 2009. Of course, there is always room for improvement in matters of process. For example, the commissioner rightly highlights that there has been an over-reliance on Household Expenditure Measure benchmarks when verifying an applicant’s living expenses. But such process deficiencies do not require fundamental change to address and, notably, through the Combined Industry Forum, the industry has already taken steps to self-regulate in many areas.
Reasonable people recognise that a residential home lending landscape which has, with few exceptions, delivered good outcomes, has served us well. However, there are those who are not satisfied with this, instead insisting on a Utopian zero-tolerance approach, with little to no regard for the consequences of the radical changes they propose in pursuit of this. The commissioner seems to have been lulled into this pipe dream by the comments from the likes of consumer advocacy group CHOICE and a self-interested CBA.
Some degree of misconduct exists in every sector of the economy. That is normal. But for Hayne to argue that in broking it is systemic and requiring an overhaul is naive, reckless and without evidence. He has come up with a solution looking for a problem.
Make no mistake. Should Commissioner Hayne’s recommendations be implemented in full, the very consumers that they seek to protect will be the ultimate losers. Any legislation which directly or indirectly limits consumers’ access to the mortgage broking channel will ultimately inhibit competition, with the major banks being the only beneficiaries.
In particular, the commissioner’s purist recommendation to remove all perceived conflicts of interest by moving to what is essentially an “advance-payment” model which would discourage consumers from engaging an independent agent to gather the information for them. His recommendations strip guaranteed access by borrowers to information about the market and will have an extremely anti-competitive effect. We will be going back to the bad old days when borrowers were usually in the dark and were completely in the hands of their bank. Wasn’t the Royal Commission about the bank abusing their power? So why are we considering giving more to them?
Fundamentally, when did commission become a dirty word? If anything – with the right disclosures in place to manage any real or perceived conflicts of interest – commission-based remuneration may well be morally superior, affording consumers the benefits of a service that they may otherwise be unable or unwilling to pay for.
The commissioner has recommended that a Treasury-led working group be established to monitor his proposed changes. However, as we saw with the knee-jerk reaction of the Gillard government to live cattle exports, it can be very difficult for an industry to recover after government realises that it has made a mistake.
Australia already enjoys a strong residential home lending landscape – one in which consumers have multiple channels from which choose. The fact that consumers are increasingly choosing to deal with the mortgage broker channel is a ringing endorsement of the channel’s value proposition.
In fact, Corelogic’s Comparator business noted that 59.1 per cent of all residential home loans were settled by mortgage brokers in the September 2018 quarter, a figure which has been consistently growing. Consumers are voting with their feet.
In addition to helping borrowers navigate increasingly complex credit policies, consumers have directly benefited from the competition which mortgage brokers have introduced to the market. According to Deloitte’s 2018 report into The Value of Mortgage Broking, the mortgage broking industry has contributed to the fall in net interest rate margins by over three per cent over the past 30 years.
It’s worth mentioning that the commissioner had the right to request that the terms of reference be broadened. However, with the terms as they were, the Royal Commission only looked at examples of misconduct. Therefore, the commissioner was, sadly, not exposed to the countless examples of great customer outcomes and above-and-beyond service which are emblematic of small-business operators who are reliant on word-of-mouth referrals to grow their mortgage broking business. As such, it would be understandably difficult for him to fully appreciate the peripheral value that a broker adds in their relationship with their clients. This is compounded by the fact that, although no doubt a brilliant legal mind, he is generalist, needing to absorb complex concepts across of range of subject matter in which is not an expert.
The general reaction to the commissioner’s big “solution” is that it is largely a limp and disappointing report, which inadequately addresses the outrages which shocked the nation. The focus of any action by government around residential home lending should be directed to the decision makers and the umpires – i.e. the banks and the regulators. The banks are the ones who make the ultimate call about whether to approve a loan. And where the system fails a consumer, the regulators should be sufficiently resourced to deal with this after the fact.
In considering the commissioner’s recommendations, we can only hope that our politicians have the clout to recognise the important role that mortgage brokers play in maintaining competition in this fundamental sector and preserve their existence.
As Milton Friedman noted, “I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse”.
Jai Martinkovits is Managing Director of Finance Ferret Pty Ltd.
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