The Australian Financial Review published a great article focusing on the impact to the broking industry if the Hayne Royal Commission recommendations proceed. It also touches on the impact to property consumers (or customers) who will lose out in a big way, which we will explore in more detail.
How Broking Works:
- Brokers are engaged by consumers to shop around for the best lending option for them.
- The banks and other lenders currently pay the brokers an initial commission, as it saves them time in servicing these customers, and essentially the brokers are selling their product for them.
- Brokers are also paid an ongoing (trailer) commission by the lender to help ensure customer loyalty.
- Consumers do not pay brokers directly.
The Hayne Royal Commission sees this as a potential conflict, as some lenders pay greater incentives than others, therefore dodgy brokers may not put their customer’s best interests first, both at the outset of and throughout the term of the loan. Commissioner Hayne’s recommendation is to remove commission/incentive payments payable by these banks and lenders.
There is an obvious and real flow on effect being:
- Brokers will have to earn their fees another way (i.e. by charging consumers directly for their service).
- Most customers will not be prepared to pay this fee for broking services.
- Many brokers and second tier lenders will not be feasible and will have to close down (as referenced in the AFR article).
- There will be less competition in the lending market, and rates and fees will almost certainly increase.
- Consumers will have to personally investigate lending options themselves to secure the best product for them, often without some of the skills or knowledge to do so.
Importantly, while consumers will be left with a hefty bill and/or less choice, the banks are already profiteering. In an article by ABC News, the share price of the financial sector increased in one day by about 5% (or $20 billion), largely thanks to this particular recommendation. Michael Janda from the ABC states “The changes may also see more customers go to the major banks for loans, with their bigger branch networks and advertising budgets.”
Of course, there are good reasons why the recommendation was made – to protect consumers from brokers pushing unnecessary or incompatible products which may not be in the customer’s best interests. But the point is this: if a consumer does not want a loan, they will not approach a broker. But if they DO want a loan, and they can’t approach a broker – because of cost or because brokers have gone out of business – they will need to approach a major bank directly who will push their own unnecessary or incompatible products which may not be in the customer’s best interests. Doesn’t really solve the problem, does it?
There’s enough for property consumers to worry about when transacting a property. The last thing customers need is to pay more, have less choice or have more homework.
In the Royal Commission’s findings, good operators are being tarred with the same brush as cowboys in the broking industry when home loans are sold. There are two obvious solutions:
- Regulate commissions. If lenders are paying equal incentives to brokers at all stages in the process, brokers will be less biased in their recommendations to their customers.
- A detailed report for each broking deal completed which is submitted as part of an annual audit to ASIC, the governing body for financial services licensing. This report will outline the due diligence and an explanation as to why a lender is selected for each customer.
No doubt there will be much discussion as to how the Hayne report is legislated, and hopefully common sense will prevail. Let’s just hope that common sense includes upholding the rights of the consumers which the Royal Commission was endeavouring to improve in the first place.
