Royal Banking Commission: Banks let off the hook whilst Mortgage Brokers slammed (original) (raw)
Ishan Dan
CEO & Founder @ RegenX | Impact Investing via Real World Asset Tokenisation | Blockchain for Impact | Digital Ledger Technology | Start-up Life
Published Feb 5, 2019
Royal Banking Commission: Banks let off the hook whilst Mortgage Brokers slammed
And that’s a wrap. The Royal Banking Commission is finally over, pop a bottle of bubbly it’s going to be a good day on the market for bank shares. The modesty of the Hayne’s recommendations shows that the report stopped short of making any damaging recommendations to lending requirements or detrimental structural changes to the big banks. You might ask why? Most of the damage has already been done and is well and truly factored in. The banks have already divested non-core assets and APRA enforced strict lending regulations. Banks shares have been slammed and old bad bank behaviour is on the way out. The real reason Hayne stopped short was to prevent a crushing credit squeeze followed by a housing collapse and economic slump. Unfortunately, those looking for blood from the banks, will be bitterly disappointed. It wasn’t a brutal bank bashing recommendation. It was a reasonable and measured report. NAB’s leadership however was singled out and lambasted for its failure in learning from past mistakes. Hayne said there is a ‘wide gap’ between NAB’s actions in public and what it does in practice.
Here is a quick summary of the main recommendations:
- Mortgage brokers will not be able to charge trail commissions. Brokers will be subject to best interests duty. Currently there was no best interest duty that mortgage brokers need to adhere to. The Government will ban commissions from July 2020.
- The government has adopted 75 of the 76 recommendation.
- Conflicted remuneration - Hayne called for an end to grandfathered commissions. That includes trail commissions agreed to before the FOFA reforms were introduced. From 2021 all such payments would be banned.
- Superannuation – The process for creating new super accounts will be overhauled. The report recommended that a superannuant should only have 1 default super account, not multiple accounts. It also recommended banning fees from MySuper accounts.
- No recommendation for structural separation.
- NAB singled out.
- Insurance – Some questionable funeral insurance products will be eliminated.
- No specific individuals up for criminal charges.
- The twin peaks model of financial regulation be retained (ASIC/APRA). A new oversight body will monitor and assess ASIC and APRA.
All in all, the 76 recommendations were mainly modest reforms. Most of which has already been implemented. No criminal charges laid and no ban on vertical integration despite all of the big banks having already moved to sell and divest non-core assets to prevent vertical integration.
Instead of banks being brutally punished for their wrong doings, they were given a free kick after Hayne recommended the mortgage broking industry move from a commission-based to fee-based model. In other words, home loan customers would be forced to pay an upfront fee (e.g. 2,000−2,000-2,000−4,000) to use a mortgage broker. Would you pay an upfront fee to use a mortgage broker? Absolutely not. In one fell swoop, the mortgage broking industry is shaken to the core. It could cause a shift of customers not willing to pay upfront fees back to the big banks. The banks win again. But Hayne does have a point. It’s no different from the FOFA reforms that hit the financial planning / stockbroking industry in 2013. A core part of the reform was the ban on conflicted remuneration, that is, any benefit (whether monetary or non-monetary) given to a financial services licensee who provides financial product advice to a retail client that could influence: the choice of financial product recommended, or the financial product advice given to retail clients by the licensee or representative. The most common forms of remuneration in relation to superannuation and investment advice likely to be ‘conflicted remuneration’, and therefore banned, included upfront and trail commissions. Whilst it inflicted massive change and significantly impacted advisers who earned revenue from trail commissions, it was a positive change that put the client first.
Currently brokers receive commissions from banks for securing a loan. It means the broker is looking out for their best interests. With the canning of trail commissions, the broker is no longer incentivised to push the highest commission paying lending product. The mortgage broker will now do what’s best for the client because the borrower pays the fee instead. But that causes an unintended knock on effect. Mortgage brokers usually give kick backs to real estate agents for client referrals. These kick backs will effectively be abolished. Interest rates will go up. By getting rid of trail commissions, brokers will make up the difference by increasing the price of loans. Up front commissions will be pricey, just to make up the difference. This in effect, raises interest rates and puts negative pressure on the housing market.
The biggest winners from the Hayne report, undeniably, were the big banks. Not only will they save money by not having to pay trail commissions to mortgage brokers, they’ll also win the lion share of this big business. The biggest losers are the mortgage brokers. While it may seem unfair and almost feels like mortgage brokers took the rap for bad bank behaviour, this regulation makes sense. A mortgage broker should be required to complete a statement of advice for giving loan advice and be penalised or sued if the wrong product is sold. In similar fashion to a financial planner.