The final report from the Banking Royal Commission was released after market close yesterday.
In it was no less than 76 recommendations to try and curb the ridiculous amount of greed and misconduct in the Aussie financial sector which was harming both customers and businesses.
Treasurer Josh Frydenberg has promised action on every single one of these recommendations. However, the government has halted in adopting the advice for cracking down on trailing commission’s mortgage brokers, which suggested a borrower-pays method instead.
As the Australian Associated Press reports, while they agree trailing commissions need to be banned, Frydenberg and his government are not convinced a customer-paid fee is the best alternative.
Upending the mortgage broker business
Commissioner Kenneth Hayne QC brought up the issue in his interim report:
‘Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?’
In the final report, the switch to a borrower-pays model was suggested to occur over two–three years, beginning with a trail commission ban, and then moving on to other commissions.
The report argued that trail commissions ‘stand as an incentive for brokers not to “switch” borrowers in and out of different mortgage arrangements’.
‘It is said that the payment of trail commissions somehow keeps the broker ‘in touch’ with the borrower. But how and why the payment of trail commission is necessary to achieving either of these results has not been satisfactorily explained.
‘The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing.
‘The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.’
But Frydenberg isn’t sure a customer-paid fee is the right way to go. He thinks it would just give banks — namely, the Big Four — a ‘free kick’ and reduce competition.
This is because much of the $2.4 billion a year banks pay to mortgage brokers would be slashed with this new scheme, and so it may be more likely for interest rates to be hiked.
According to AAP, Frydenberg told the Nine Network:
‘What we’re concerned there about is the impact on competition.
‘The Government recognises the importance of competition in the home lending sector and will proceed carefully and in stages, consistent with the recommendation, with reforms to ensure that the changes do not adversely impact consumers’ access to lenders and competition in the home lending market.
‘We don’t want the work that is currently with 25,000 small business and people working within the mortgage broking industry just simply to go to the big banks.’
More than 50% of Australian mortgages are written by mortgage brokers, with 28% of their deals being set by institutions other than the Big Four.
Where to go from here
In more appealing news, Frydenberg’s initial response to the report included a $30 million compensation scheme to compensate victims of misconduct by institutions which no longer exist.
According to AAP, Labor are trying to advocate a more impressive call to action, by insisting they will support all 76 recommendations if elected.
We’ve already pointed out why this isn’t exactly the best way forward. But if you still aren’t convinced, Mortgage & Finance Association of Australia chief executive Mike Felton has this to say about the shift to the borrower-pays method:
‘That would be a shock to the system. Even if banks have to charge a fee equivalent to the cost of doing a deal internally, as the report suggests, their marginal cost is lower than a broker due to economies of scale, so banks will inevitably undercut the brokers. This could end up forcing customers to bank branches and entrench the big bank power, while making it harder for customers to access credit.’
Thankfully, parliament agree on one thing. While the royal commission certainly revealed some nasty behaviour, neither side of politics are refusing donations for the Big Four.
‘The important thing is to ensure that no donation influences policy,’ shadow treasurer Chris Bowen told ABC News.
Take their money but leave them with their pain. Good idea.
Free Report: Phil Anderson reveals a virtually unknown, monarchy inspired income stream that he believes could financially benefit every tax paying Aussie citizen for the next 100 years.