Brokers are the fall guys for the big banks' misdeeds

In my column today I write that the biggest winners from the royal commission are demonstrably the big banks while the largest losers are Australia’s mortgage brokers. Indeed, the top end of town have done an amazing job (as we predicted) convincing everyone that brokers should be made the “fall guys” for their own deeds, surreptitiously fattening their profits, despite no evidence of pervasive misconduct (click on that link to read the full column or AFR subs can click here). Excerpt enclosed:

The single biggest cost a lender incurs when selling a home loan is the 0.6 per cent upfront commission and 0.2 per cent annual trailing commission that they pay to a mortgage broker. If the royal commission has its way and/or Labor comes to power, these commissions will disappear completely, destroying the existing business models of the 20,000 mortgage brokers (and their employees) that rely on this revenue.

This is horrific news for aggregator businesses that have built up large networks of brokers licenced by them in exchange for a share of the revenue they generate. The only hope the latter have is to quickly shift into lending and securitising themselves: the ban on broker commissions will radically reduce bank and non-bank mortgage distribution costs, which is, ironically, going to be a huge profitability fillip for funders.

According to CBA evidence cited by the commission, a bank typically has to pay a mortgage broker $6,600 in fees to sell a loan via this channel, which accounts for almost 60 per cent of all residential mortgages written in Australia. Under the commission’s proposal, these costs will disappear and be shunted on to consumers, whom CBA says should be prepared to pay about $2,310 for the service.

The commission further recommends that brokers are subject to an onerous duty to always act in the best interests of customers—shifting their commercial responsibility away from the lender towards the borrower.

Finally, they would be regulated for the first time under the much stricter future of financial advice (FoFA) laws that apply to planners. This would mean brokers have to render a comprehensive statement of advice every time they suggest a loan and could be sued if the product was inappropriate for the customer in question.

While these solutions may make sense, it’s hard to imagine that consumers will be prepared to pay thousands of dollars just to get a home loan, which is one of the most common and basic of all financial products... 

The other huge win for the big banks was the commission’s about-face on the (reckless) responsible lending laws, which Labor introduced in 2009 to try and bizarrely shift liability for repaying a home loan away from the borrower to the lender in a reversal of a contractual relationship that has successfully existed for hundreds of years.

The interim report's activist allegations (repeatedly criticised by this column) about banks’ breaching these laws were almost entirely junked by Hayne. He was forced to do this because two recent analyses from the Federal Court’s Justice Nye Perram and its amicus, former solicitor general Justin Gleeson, arrived at diametrically contrary conclusions to the commission about how banks should interpret the laws.

In particular, the Federal Court found that banks do not need to check a borrower’s expenses to comply with them and that they do not prevent lenders from relying on independent statistical benchmarks like the household expenditure measure, which had been pilloried by the interim report. (Hayne did hint at deficiencies in the laws' nebulous drafting, which gut them of much meaning.)

As UBS’s Jon Mott was compelled to concede on Tuesday, this is a “clear win for the banks”. Mott had previously talked-up the risk of banks facing waves of class action litigation on the responsible lending laws, which we had countered was unlikely because of the difficulties of identifying a singular class of litigants given the non-scalability of the legislation...

While we forecast a 10 per cent decline in Aussie house prices in early 2017, which UBS embraced some 12 months later, we have never subscribed to Mott’s thesis that housing credit growth will turn substantially negative. Our base-case remains the housing credit growth will be positive while national home values correct 10 to 15 per cent.

Read the full column here.