The Banking Royal Commission

  • 20 March, 2019
  • Greg Pierlot

It is now 6 weeks since the Banking Royal Commission Report was delivered to the Government.

With all the emotion, media and public interest in the Commission findings, we decided to let the dust settle before providing our views.

In the days and weeks following the announcement, the discussion was all about Brokers! Not the Banks and their business practices, which was the basis for having a Royal Commission!

This was not what we expected prior to Feb 4!

However, since then the feeling in the media, community and industry has significantly changed.

Industry bodies such as MFAA, FBAA, Aggregators and smaller Banks have been busy lobbying Government officials and local MP’s etc. explaining the likely ramifications that would flow from full implementation of the initial recommendations.

Banking Royal Commission – Broker Remuneration Model

Both the current Government, and Opposition now appear to support retention of Broker Remuneration Model as a way of preserving choice and competition in the marketplace.

The Government is proposing a continuation of the current model for 3 years subject to review, whilst Labor is favouring a higher upfront commission without trail.

Both support a Lender pays rather than a borrower pays model.

That said, we will not know the final details until after the Federal Election.

Regardless, this is still a big shift, and a positive one for the broker industry and our clients.

Banking Royal Commission – The 500 Group Position

Overall, we are comfortable with the direction of changes flowing from the Banking Royal Commission, albeit there are details still to be ironed out.

Our view is the current model is still the most appropriate to provide the best outcomes for our clients.

That said, whatever the final decision, we are confident our business is well positioned to manage any changes to the Broker Remuneration Model.

Our understanding of the proposed changes

The 3 key recommendations which focussed on our industry were:

  • Recommendation 1.2 – Best interests’ duty
  • Recommendation 1.3 – Mortgage broker remuneration
  • Recommendation 1.5 – Mortgage brokers as financial advisers

Whilst the details are yet to be finalised, both political parties now appear to support the existing Remuneration Model for residential lending.

No changes have been proposed for Commercial or Asset Finance at this stage.

Customer Best Interest

The Royal Commission has recommended the introduction of “customer best interest” responsibilities for Brokers and civil penalties for those that transgress.

However, it is important to note since 2009, Brokers have been subject to responsible lending obligations under the National Consumer Credit Protection Act.

The vast majority of Brokers are exceptionally client focused, and understand that working in the customers best interest, is the pathway to creating value in their business.

As in our business, Brokers rely heavily on building long-term relationships with their clients and generate the majority of new business opportunity via word of mouth. This simply cannot be achieved if you are not acting in the client’s best interest.

Mortgage Broker Remuneration

One of the unexpected and key recommendations of the Hayne Royal Commission, was that both upfront and trail commission paid by Lenders to cease.

Instead it was proposed that borrowers pay an upfront amount when applying for a loan.

This had the potential to decimate competition and choice – and ultimately cost borrowers more!

Today, when a loan is settled, Brokers receive an upfront payment of approx.
0.60% and then a monthly trail of 0.15% whilst the loan remains with that Lender.

For example, on a Home Loan of say $800,000 currently, because of intense competition, most borrowers won’t pay an Application Fee!

However, under the “borrower pays” model, this would have increased to approximately $4800.00! (Based on 0.60%)

The “borrower pays” model would effectively shift the cost of acquiring the loan from the Bank to the customer!

Fortunately, it seems both political parties now appear to support retention of a “Lender pays” model.

Although the final remuneration model is yet to be determined, we are confident the industry will work together with Government to achieve an outcome that ensures Brokers can continue to deliver choice, and needed competition, in the marketplace for all Australians.

Mortgage Brokers as Financial Advisers

The Royal Commission recommended that Mortgage Brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.

What this entails at this point is unknown, however we suspect it is likely to require Mortgage Brokers to hold and then maintain a level of qualifications in order to participate in the industry.

As a Group, we believe any steps that can increase the professionalism and skills of Brokers can only be a good thing for both the industry and our clients.

Banks continue to lend in a tough market

There is no doubt the revelations of the Royal Commission have seen:

  • A significant tightening of credit standards
  • Applications being assessed in granular detail
  • A significant lengthening of loan turnaround times

However, despite these changes multiple options are still available! You just need to know which Banks have an appetite for particular proposals and on what terms.

The key is to plan ahead and involve your Broker as soon as possible to navigate the process.