The Productivity Commission…. PC or not?
The Productivity Commission.. What is the hooha all about?
Over the last few months there has been a lot more discussion in the news around the Productivity Commission. However I find myself and others asking me, what is it? Why has there been so much of a focus on the Broker network, Why are they doing all this and who is leading this investigation…
Well, the Productivity Commission – powered by ASIC (Australian Securities and Investments Commissions) are investigating many things in the banking industry. One of which is of interest to me is- “Are Mortgage Brokers acting in the best interests of their clients?”
So the next question I would ask is, why do they think Mortgage Brokers are not? Is it like that of the banks – where they are reviewing the commission structures to make sure their employees are being paid to give you what you need, not what they get paid to sell more of? Well yes, I would say pretty much exactly the same thing.
I think there is a large misconception out there though around Mortgage Brokers and they way that they get paid.. Did you know that your Mortgage Broker is required to disclose to you what they are being paid to do your lending? Did you know that even though a broker can spend hours and hours on your lending, that they don’t get paid, until the deal is written and settled – a couple of months later?
A Little bit of Broker History…. Did you know that back in the early 2000’s the industry introduced a Clawback ruling? A clawback means that even though your broker has worked very hard to give you the best lending possible and formulate a structure that helps support your goals, that if you refinance, move or close your loan, that your broker is asked to pay any money he got paid to do the work back to the bank? Most banks have a 12- 18 month clawback period, however some can be as long as 24 months! This was introduced to stop what was referred to as “churning”. Some Brokers- back before these industry reforms were made, were deemed to be “churning” their clients, re-writing their loans frequently to ensure they could keep getting paid. “Churning” was probably not within the best interest of a brokers clients.
Around the time that the Clawback rulings were enforced. The industry was also met with more reform. The MFAA was also introduced (Mortgage and Finance Association Australia). They were brought in to regulate and reform some of the industry. Now before this time the words “dodgy” and “broker” were probably quite synonymous. However today we are looking at an industry that is largely full of bankers running their own business with the knowledge and the knowhow to “do the right thing by their client”. They are regulated and asked to disclose their commission structures. They give advise and those who hold their own licence are generally ensuring they give you sound advice due to your financial position as their lively hood depends on it. I would probably even go as far as to ask… is the clawback ruling encouraging brokers to “do the right thing by their client?”
So has anything good come out of this reform? I would say ‘Yes”. There has already been some fantastic and very much needed discussions within the industry.
Did you know that 53% of all home loans written in Australia last year were written by a broker – that is a broker took the lending – wrote the deal and presented it to the banks? That’s a great proposition if you ask me. I would love it if people just knocked on our door and said – “hey – want to write this loan!”
More interesting is that in the UK today 73% of all lending is actually written by brokers after a major industry reforms took place a couple of years ago.
Already some of the reforms that have been introduced – like the abolishment of tiered rewards has been a welcomed change. In the past banks have rewarded their brokers based on how much lending was placed with them ie. the more loans you wrote, the better service you got, the more sporting events you were invited to and so on. Now the banks have been forced to look at other rewards, such as – how much time have they had to spend working on the brokers deals, how many have been reworked, how many have been missing information etc. Therefore, in the future the better brokers will be rewarded for their consistent performance – not how much they threw at the bank.
The reform is also looking at whether bank owned mortgage companies are really offering you an unbiased solution. Can you really offer a more competitive loan with another bank if you are owned by one of the big four banks?
So in earnest, these are the types of changes that were probably needed. You should always reward people for the behaviours that you are trying to encourage (Says the parent of two small children!)
The intention of a Broker should always be to give you – his/her client, the best loan to suit your needs. After all isn’t that why you go to a broker in the first place? Educated, unbiased choice? lets face it, some one who can do all the running around and negotiations so you don’t have to?!
Your broker is your banker, the one you have a chat to for their opinion on what to do next, the one you can call when you need them, the one who has contacts at each of the banks.
So.. what do I think we can we expect to see over the next couple of months with the lead up to ASIC’s final report?
I think we may see a few things come out of all of this…
1. Greater reporting / visibility
Brokers having to keep detailed reports, which banks they are lodging deals with and why, written Financial advice and maintaining Identification documents etc. Most brokers who have been around for awhile and have had long term employment in the industry will already be doing this, however it is surprising how many just don’t do these things!
2. Mandatory training
Probably wise, however currently not being done. I think the industry body and the banks will and should insist on more training to ensure the knowledge of all brokers are at a similar level.
3. Systems and reporting
Currently most brokers will have an aggregator that they use. It is anticipated going forward that these may be used to assist the governing bodies on which banks are being used for what purpose. The reporting will also be used to spot any unusual trends that may need to be investigated.
4. Remuneration – changes.
Not changes to how brokers get paid, however changes to how banks reward their “top performing” Brokers. Going forward I believe that they will change from volume based to quality of a brokers work.
5. We will probably also see a change to the wording of a Brokers obligations.
Currently under the NCCP (National Consumer Credit Protection) it states that a broker is obligated to “help arrange a not unsuitable loan”. I think we may even see this changed to something like “to do the right thing by your client” or ” to act in the best interest of their clients according to their financial position?” or even “good customer outcome” I am no wordsmith, however something like this would probably suffice.
Currently there are so many discussions happening behind the scenes, the MFAA, FBAA and the banks have combine resources to formulate a proactive association that is assisting ASIC with their enquiry called the Combined Industry Forum (CIF).
If you are as interested in what happens next as I am – stay tuned and I will keep you up to date as ASIC hand in their final report in June 2018.
