Royal Commission Update

December 3rd, 2018

 

Connective has been closely observing the final round of hearings at the Royal Commission, which primarily involves the CEOs of the major banks.

Disappointingly, the mortgage and finance industry was not well served on the first day of these hearings. A disproportionate amount of time was devoted to mortgage broker remuneration.

Of greatest concern was the line of questioning. It’s focus suggested the Royal Commission believes mortgage broker remuneration should move towards a flat fee (much reduced from current rates) paid for by the consumer.

You can read the full transcripts of CBA CEO Matt Comyn’s evidence on the Royal Commission website. Also available on the site are all of the exhibits referred to in the proceeding.

Do we really have a problem to fix?

Our answer to this broker remuneration question is ‘no’. Our submission to the Royal Commission focused on the materially lower proportion of complaints and incidents of misconduct within the mortgage broking industry relative to the entire financial services industry.

The growth of the mortgage and finance broking industry in recent years has given rise to greater competition amongst lenders. There has also been a correlated and strong downward pressure on interest margins across the entire home loan lending market.

As a result, banks are making materially less interest margin than they would without the competition that brokers facilitate. This is undeniably a positive outcome for all consumers, regardless of whether they use a broker or go direct to their lender of choice.

What’s more, broker remuneration has been scrutinised in several reviews over the past two years, with none of these studies finding systemic misconduct and none advocating substantial reform. Notable amongst these is the ASIC Report which relied on the most comprehensive data set ever collected by any party for this purpose.

Changing the current broker remuneration structure to a fee for service model would substantially hurt mortgage brokers and, in turn, all home loan consumers. It would serve to weaken the broker channel and this would be of benefit only to lenders with large branch networks. (CBA have conservatively quoted accumulated savings of approximately $197 million over 5 years).

Would consumers really be better off?

Does it make sense to disrupt the entire home loan industry for the sake of removing the Royal Commission’s perceived “conflicts” within the current remuneration structure? No it doesn’t.

Compare the views of CBA against those of Mr Moore, CEO of Macquarie – the latter acknowledging the role brokers play in bringing to light the different offers available. Will consumers really be better off if competition is reduced and home lending is consolidated into those lenders with large branch networks?

Regarding trail commission, the industry needs to stand together and ensure there is no uncertainty as to what trail commission represents. Consumers need ongoing support to ensure their home loan products remain competitive and ‘not unsuitable’ in the long term.

It was all a bit too convenient that when asked what ongoing services a mortgage broker supplies, Mr Comyn responded “I think they would be limited”, continuing upon further questioning to state “closer to none” as this aligned with the “fee for no service” theme that has arisen throughout the Royal Commission.

A better way to justify trail commission is as Mr Moore put it. When questioned as to the current remuneration structure, Mr Moore answered “…. our position is we would like it, coming back to the alignment point, to reflect the value being delivered which is over the life of the loan.”

Let’s take action!

Connective supports and echoes the sentiments voiced by our peers at AFG and Loan Market last week. As an industry, now is the time to unite and ensure we speak with a consistent voice. As a broker, it’s time to stand up and make yourself heard, primarily with your local member, the Federal Government and the Federal Opposition. You can get in touch with your local member here.