6 minute read
LEGAL
By Jonathan Flaws
Aussie Report Card or finger in the dyke
A positive interpretation of the Hayne's report – it's not all bad news for brokers.
It’s always interesting reading your
children’s report card from school.
Normally its relatively brief and gives a snapshot of what the teachers and headmaster think of your child’s performance. It is something to read with interest and encourage your child to respond positively and either do better or keep up the good work.
Although the Hon Kenneth Hayne AC QC delivered a 495-page review on misconduct in the Banking, Superannuation and Financial
Services Industry only 21 pages were devoted to comments and recommendations on intermediated home lending. To read the response of brokers in the Australian media you could be forgiven for thinking this would be the end of the industry – they would have to either get out or stay in and go broke.
Maybe I am blinded by the fact that
Haynes is a well-respected commercial lawyer who sat on the High Court and is generally regarded as knowing what he is talking about; maybe it’s because I am sitting on the other side of the ditch and reading the report without being entrenched on the side of Australian brokers; maybe it’s because I suggested some years ago that to survive, brokers would have to consider themselves as professionals and receive a fee for service from clients rather than a sales commission; but I think if the report is approached like a school report card it has some positives that will make the mortgage broking industry sustainable in the long term and keep brokers profitable.
The title suggests there is a flood of misconduct and the credit code dyke, built by the federal legislators to hold back the flood, has holes looking for fingers. At page 77 of the report, Haynes uses a similar Dutch reference to justify his suggested changes.
“Changes of the kind that I have described above were introduced in the Netherlands in 2013. The mortgage broking industry continued without significant adverse consequences to its own operations, the market generally or individual participants.
Mortgage brokers offered different remuneration arrangements including charging an hourly rate for advice and flat fees. Furthermore, to ‘create a level playing field’ between direct and intermediated lending, lenders were required to identify their costs of providing advice and other services to borrowers who did not use a broker and expressly charge a fee to recover those costs from those borrowers.”
The Dutch have already placed a finger in the dyke.
What he is saying is that what he is recommending has been tried elsewhere and has worked. His last comment is something that brokers should take to heart because he is suggesting that direct lenders
should be required to create a level playing field so that whether a consumer takes a mortgage direct or via a broker, the same rules about charging for advice apply and the cost to the consumer is the same.
In a nutshell, what he recommends is replacing lender paid commissions, both upfront and trail, with a fee for service that is paid for by the borrower.
But he also says that the borrower should not have to find these from his or her own pocket, they should be included, transparently, in the amount borrowed and repaid over the term of the loan with the principal advanced. Yes, he does have some strong words to say about trail commissions but doesn’t suggest these be removed immediately. He also says that in setting the fees, if a broker wants to receive a trail then he can build an NPV calculation for the trail into what is paid upfront. Which in theory, I suppose a broker could do – in theory.
Haynes concludes that borrowers pay for commissions anyway because it is obvious that the lender will build these into the cost of the loan, whether by way of interest margin or credit fees. But it is only a few really savvy borrowers who realise this. He thinks this goes against the whole concept of consumer lending which is that all aspects of the lending should be transparent to the borrower.
More radically, he says that brokers should not be disadvantaged and cut out of the market by lenders relying on and pushing direct lending. Lenders should also charge fees for advice and loan assistance and include these openly in the loan amount and disclose them to the borrower. Whether a loan is originated direct or through an intermediary the cost should be the same.
This doesn’t seem to me like Haynes is bashing brokers, but simply saying you need to change how you do things. In fact, he outlines at the start of the section why borrowers will use a broker:
“First, borrowers look to mortgage brokers for advice about how to finance what is, for many borrowers, the most valuable asset they will buy in a single transaction. And brokers not only give advice about what they think is best for the borrower, they submit the loan application on the borrower’s behalf and, to the extent the terms are negotiable, negotiate the terms of the loan for the borrower.”
He points to an ASIC report in March 2017 that says:
“three main reasons consumers then gave for using a mortgage broker were to ‘Access a wider range of loans’, to ‘Get a better interest rate/deal’, and because the ‘Broker is knowledgeable/an expert’.”
Giving advice, helping submit a loan application and negotiating the terms of the loan are very valuable things and frankly, this is the valuable service that brokers provide and for which they are entitled to be rewarded.
Where he sees confusion and conflict is in the brokers relationship with the lender. The broker is employed by the borrower therefore the borrower is the broker’s client. The broker owes or should owe a duty of care to act in the best interests of the client. Interestingly, he does labour the point that in Australia, brokers are not required by law to act in the best interest of the client in the same way that financial advisers have this statutory requirement. The Corporations Act excludes advice on home lending from this requirement. He suggests this needs to change.
The lender pays the commission at present and considers the broker as part of its distribution channel. Lenders seek to foster relationships with brokers that encourage the broker to recommend the lender’s products. But all lenders contracts with brokers and aggregators very clearly carve out responsibility and state that the broker is the agent of and acts for the borrower and not the lender. He calls the broker’s commission “conflicted remuneration”. If the ASIC report as to why consumers use brokers is correct, then it seems to me that conflicted remuneration is more likely than not to act against those reasons.
In my view, the Haynes report should be read like a school report card and not a bad one at that. Brokers on both sides of the Tasman should take it to heart, consider its recommendations and work towards doing better in the future. ✚
Jonathan Flaws is a partner at legal firm Sanderson Weir.
WE CAN WHEN OTHERS CAN’T WE WILL WHEN OTHERS WON’T
FOR ALL YOUR NON BANK LENDING
