Instead brokers could be forced to charge borrowers a fee if the government adopts the proposals.
However, representatives have warned it could hit brokers and borrowers hard as the proposed fee would potentially be for less than the cost to a broker of making the application.
The 500-page final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry paid particularly close attention to mortgage broker conduct.
It highlighted that brokers should be compelled by law to act “in the best interests of the intending borrower” and that they should be subject to the same rules as financial advisers.
‘Pursuit of profit’
Commissioner Kenneth Hayne painted a damning picture of the Australian financial services industry where providing a service to customers was “relegated to second place and sales became all important”.
“In almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business,” the report said.
“Those who dealt with customers became sellers. And the confusion of roles extended well beyond front line service staff. Advisers became sellers and sellers became advisers.”
It also emphasised that while rewarding misconduct was wrong, incentive, bonus and commission schemes throughout the industry measured sales and profit, but not compliance with the law and proper standards.
The commissioner particularly highlighted conflicts between duty and interest in the mortgage broking industry and noted that a “good enough outcome was pursued instead of the best interests of the relevant clients or members.”
Two key proposals were made regarding mortgage brokers. They were:
- The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.
- After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
Restrict smaller lenders
Mortgage and Finance Association of Australia CEO Mike Felton said the recommendations were a big win for the big four banks as it would drive customers down direct channels.
Felton noted that brokers helped to drive competition by providing a shopfront for smaller lenders, particularly for rural and regional customers.
“These policy recommendations are effectively a new multi-thousand-dollar tax on borrowing,” he said.
“They will put the broker channel at severe risk, damaging competition and access to credit and entrench bank power.
“I fail to see how decimating the broker channel, leaving Australians with a handful of lenders to choose from, is good for competition, or good for customers.”
Felton also highlighted research which found 96.5 per cent of customers were not willing to make a payment to a broker of $2,000 and most were unwilling to pay anything at all.
“This sort of fee would see consumers deserting brokers, cutting access to smaller lenders and driving consumers into the branches of the major lenders,” he continued.
“This will increase bank power, and make getting access to a home loan harder and more expensive for home buyers.”