In Australia, every mortgage broker is talking about one trending topic at this moment, Banking Royal Commission. Since the day the recommendations were made public, it has brought turmoil in the Mortgage broking industry. We can say that this recommendation is somewhat favorable to the Big four banks only. Read on as we tell you how it adversely affects the Australian home loan market.
What is Banking Royal Commission?
The Australian Government established the Banking Royal Commission under the Royal Commissions Act 1902 on 14 December 2017. It is most commonly known as the Royal Commission or RC. The government of Australia established the Banking Royal Commission to inquire into and report on misconduct in the banking, superannuation and financial services industry. The commission revealed in the media the misconduct of various Australian financial institutions. It also revealed a lack of regulatory intervention by the relevant government authorities in the banking and finance sector.
The Commissioner, the Honourable Justice Kenneth Madison Hayne submitted the interim report to the Governor-General of Australia on 28 September 2018. The Government tabled this in parliament on the same day.
The Banking Royal Commission conducted seven rounds of public hearings over 68 days. It also called more than 130 witnesses and reviewed over 10,000 public submissions. Commissioner Hayne submitted a final report to the Governor-General on 1 February 2019 with 76 separate recommendations. On 4th February 2019, the final report was brought forward in the Parliament. The Government’s response was made public on the same day.
According to Productivity Commission, mortgage brokers receive an up-front commission from lenders of about 0.6% of the loan value and a trailing commission of around 0.2% of the loan outstanding per year till the life of the loan.
Banking Royal Commission Recommendation
Banking Royal Commission recommended bringing changes in the mortgage broking industry, i.e. changing the remuneration of mortgage brokers. Currently, the bank that finances the loan pays mortgage brokers an upfront commission. The bank also pays trail commission, an ongoing fee, over the life of the loan. The recommendation implies that a customer/borrower would pay an upfront fee for the arrangement of the credit, whether it will be done through a broker or directly with a bank. This is likely to be added to the total sum of the mortgage.
Royal Commission recommends borrowers would pay mortgage brokers instead of banks. According to Commissioner Haynes, this would be in the best interest of borrowers. The changes to mortgage broker remuneration model should be made over two to three years, first by banning trail commissions for new loans and then by banning other commissions.
Let’s analyze the impact of the Banking Royal Commission on various parties; brokers, small lenders, and borrowers.
Brokers
If the Australian Government approves Banking Royal Commission, brokers won’t receive any commission from the banks. Instead, borrowers will have to pay fees to brokers for loan submission. Under the commission’s proposal, the borrowers should be prepared to pay about $2,000-$2,500 for the service. It is obvious that borrowers will prefer to deal directly with the banks in this case. This fee alone will drive people away from brokers, destroy the competition in the market and lastly strengthen the big four banks even more.
The small and medium-sized brokers will be unable to survive in the market. There are over 6,000 mortgage brokers in Australia creating over 27,000 employment opportunities. With the implementation of the recommendation, some will have to leave the mortgage broking industry. Others will have to modify their business model, perhaps on a fixed fee for service basis.
However, the Banking Royal Commission has also tried to argue that if brokers have to charge a fee to customers, then banks should also have to charge a fee to retain the competition. This, in turn, will severely affect the borrowers.
Small Lenders
Banking Royal Commission will have a ripple effect on the small lenders and credit unions. These institutions highly depend upon the brokers for getting clients. Mortgage brokers are the one who helps smaller lenders compete with big lenders by providing them with a ready-made distribution network. Small lenders do not have an extensive branch network as the big lenders.
Fewer brokers in the market could mean these lenders would have to hire more direct sales staff. This results in increased operating costs. The brokers and these small lenders will be at high risk of going bankrupt and closing down their business.
Borrowers
The Commission is aiming to improve the experience and treatment of consumers in the banking and lending sector. However, some of its recommendations could work against the borrowers particularly those related to mortgage brokers. These recommendations related to mortgage brokers represent a big win only for the Big Four banks.
They will put the broker channel at high risk, erode competition and access to credit options to borrowers. This will increase the big bank’s monopoly in the market. These recommendations have highly favoured the big four banks. The interest rate will undoubtedly increase as a result of reduced competition; in turn, will adversely affect the borrowers. Commissioner Haynes described trail commissions as “money for nothing” are actually compensation for the work that brokers do to serve their clients. The brokers provide borrowers with a large number of options across different lenders. Brokers’ service is not limited to the settlement of the loan. Mortgage brokers help borrowers to manage their home loan efficiently. They can help refinance the loan with a lender offering low-interest rate. If there is a construction loan, brokers can help borrowers get progress payments. Therefore, all these post-settlement services are free of cost.
However, if the Banking Royal Commission removes brokers from the picture, the borrowers will need to manage the whole process themselves. Borrowers will need to deal with multiple departments and people. They will also need to invest time and effort to explore the loan products of various banks. If they can’t afford that time and effort, a single bank will provide them with its bank product. The banks will also charge the borrowers a fee for this service. This ultimately means borrower will end up paying for a service that is currently free.
How Can Mortgage Brokers Be Prepared If Banking Royal Commission Decision Gets Implemented?
Mortgage Brokers should be prepared for such scenarios and situations as rules and regulations will keep on changing in the future. There is no certainty that the present scenario will prevail in the future. So we must be ready to overcome such challenges. We at Outsolu Nepal, recommend the following solutions to overcome the implications of the Banking Royal Commission.
-
Reducing your operating costs
To overcome such situation, one method is Outsourcing. Brokers can outsource various tasks along with loan processing services. Those brokers who are currently outsourcing their back office tasks are in a better place than those who chose not to do so. The brokers who are already outsourcing their operations are in a favourable position. Their operating costs are already lower, compared to those brokers who are hiring back office staff locally. Hence they will be able to survive in the market.
Offshore Outsourcing, i.e. outsourcing abroad where labour costs are cheaper certainly help reduce the operating cost of the broker. Also, the cost of a business process outsourcing company is not dependent on the policy change in the Australian market. There are many BPO’s all across the globe. Here at Outsolu Nepal, we specialize in Australian loan processing service. You can hire a specialized virtual assistant, who will assist you in mortgage processing.
-
Conducting ethical business practice
When the borrower receives qualitative, effective and transparent services, the borrowers will prefer to continue working with brokers even if they have to pay a fee for the services. Retention also brings a referral. The primary source of business for a broker is referrals from the existing clients. Therefore, this helps brokers survive the changing market.
-
Ensure your compliance is up to date
Nevertheless, you need to ensure that your compliance is up to date. Outdated compliance is always our concern about whether or not the Australian Government implements the recommendations in the future. If you are not up to date with the compliance and regulatory changes, there are chances your business won’t survive for long.
-
Building other sources of passive income
Mortgage Brokers can tie up with various companies such as Real Estate Agent, Home Insurance Provider, Income Protection Insurance Providers, Solicitors and Conveyancers and Business Process Outsourcing Companies. You can set up to receive a commission from each referral you provide to the clients.
-
Sign the petition to support brokers
We are not saying that there aren’t issues with how the system works. But making borrowers pay the fee is not the proper way. It will ultimately discourage the use of brokers and drive more people to the big banks and will favour them in the coming days. We believe only time will tell the impact on brokers, banks, and customers.
One thing we are sure about is mortgage brokers are critical for competition in the Australian home loan market. That’s why we have signed the following petitions to support the mortgage broking industry. We request you to also show your support by signing these petitions.
Recent Comments