The Banking Royal Commission

[Chief]

As an aside - a friend just reminded me about the time I was getting $2000 cash out of an ATM in one of the "modern" Commonwealth bank branches with no tellers, a bank of ATMs inside and just service (sales) people milling around.

As I was getting the money out the sales girl stood beside me asking how much I was getting out, and what I was doing with it. It was none of her business so I lied and said "buying a car from my friend over there" and she pounced "Do you need finance?" - No - "Do you have car insurance?" - No thanks I'm right.

Who stands right beside you as you take money out of an ATM, demanding to know what you're doing with it? It was only as I walked out that we both said how weird it was.

Now that I think about it, the whole branch design was set up to turn tellers into sales people, moving the ATMs in close to the sales staff so they could grill you as you made your transactions. Just an awful, predatory practice to squeeze as much cash out of customers and pay as few staff as possible.

 

[Scotland]

And a good broker will also manage the entire process. I am currently building and our broker not only managed the initial application process but also facilitating all the payments, ensuring that all the documentation was correct before being submitted to the bank. On my loan only he would have to have spent the best part of a month full time (spread over the last 12 months) and my situation is fairly straightforward. Could I have done it myself? Yes. Did he make the process significantly easier and take the worry out of my hands? Hell Yes!

Yep, they are good at crossing Ts and dotting Is. You can do it all yourself, but if it doesn't cost you anything why not?

When I was starting out mine explained to me what an offset account was and the benefits of wealth packages. Now I could have garnered all that for myself, but unless you are in the banking game it's not the sort of stuff that people who don't have home loans automatically just know. Banks aren't interested in giving you a full run through of their products.

People will read the NAB or CBA website and think the best interest rate is 4.5% and apply on that basis. The bank is unlikely to tell you out of good will that for a $400 annual fee (with credit card) that the best interest rate is 4% which is a couple of grand per year off an average loan.

Brokers also have a good feel for who is and isn't easy to deal with. Easy to go into a bank and talk to someone who seems helpful and friendly and then be swallowed up into a vortex of big business inefficiency.

 

[Pessimistic]

As an aside - a friend just reminded me about the time I was getting $2000 cash out of an ATM in one of the "modern" Commonwealth bank branches with no tellers, a bank of ATMs inside and just service (sales) people milling around.

As I was getting the money out the sales girl stood beside me asking how much I was getting out, and what I was doing with it. It was none of her business so I lied and said "buying a car from my friend over there" and she pounced "Do you need finance?" - No - "Do you have car insurance?" - No thanks I'm right.

Who stands right beside you as you take money out of an ATM, demanding to know what you're doing with it? It was only as I walked out that we both said how weird it was.

Now that I think about it, the whole branch design was set up to turn tellers into sales people, moving the ATMs in close to the sales staff so they could grill you as you made your transactions. Just an awful, predatory practice to squeeze as much cash out of customers and pay as few staff as possible.

Once in kings cross I joined a line for an atm with an entrance to a girlie bar right next to it. Spruiker guy standing there letting each person know what was available for the money while withdrawing cash

 

[Chief]

Once in kings cross I joined a line for an atm with an entrance to a girlie bar right next to it. Spruiker guy standing there letting each person know what was available for the money while withdrawing cash

A fine service for the modern consumer.

 

[Pessimistic]

A fine service for the modern consumer.

I respect his honesty more than bankers.

Has any discernible change happened? All I see is them reacting to the lax lending part and giving every poor sucker the nth degree. I tool out a novated lease a couple of months back and the bank involved were campaigners

In a discussion I said ‘the money gets taken out of my salary before tax and you’re going through the application with a toothcomb to see if I can pay it off’
Just like the GFC. A month before that hit a journo got themselves 26 grand in unsecured loans from a group of supposedly legit lenders in a morning’

 

[sherb]

Not a great look.

https://www.news.com.au/finance/bus...t/news-story/42f78d326dfafde793c4523f18d88eb2

 

[Financialpanther]

Not a great look.

https://www.news.com.au/finance/bus...t/news-story/42f78d326dfafde793c4523f18d88eb2

Always going to happen - this is the fault of the Board and their Rem Committees.

 

[Pessimistic]

https://www.news.com.au/finance/bus...g/news-story/6b3d4058db96c442c05ae0e2112f32c6

Just greed. And NOT baby boomers to you out there

 

[Bombermania]

https://www.news.com.au/finance/bus...g/news-story/6b3d4058db96c442c05ae0e2112f32c6

Just greed. And NOT baby boomers to you out there

The bank should win that case, what were the borrowers thinking they were buying when they went to the bank.

 

[Papa G]

The bank should win that case, what were the borrowers thinking they were buying when they went to the bank.

Exactly. FMD. The greed comes from the Tate's trying to build their own property empire whilst using negative gearing and cross collatoralization. When it goes belly up its suddenly all the banks fault. Glory be. You tried to get rich quick and it failed, quick find someone else to blame, blubber on TV, use the current mood to peddle your sob story. The compliant media will lap it up and your ambulance chasing lawyers (who'll take a hefty COMMISSION) will get rich too.

 

[Number37]

The bank should win that case, what were the borrowers thinking they were buying when they went to the bank.

It follows the same line of argument as in the unconscionable conduct cases like Amadio (short story, parents went guarantor for sons business debts, couldn't even speak english, got left holding the can and they bank said soz but thanks for your home) .

It is an interesting case because the get-out for banks from cases like Amadio was to explicitly advise the party to get independent advice.
Is a mortgage broker or some other intermediary independent?
I'm going to say probably not .... higher court judges have a thing against banks. I wouldn't be so sure the banks will win.

 

[Bombermania]

It follows the same line of argument as in the unconscionable conduct cases like Amadio (short story, parents went guarantor for sons business debts, couldn't even speak english, got left holding the can and they bank said soz but thanks for your home) .

It is an interesting case because the get-out for banks from cases like Amadio was to explicitly advise the party to get independent advice.
Is a mortgage broker or some other intermediary independent?
I'm going to say probably not .... higher court judges have a thing against banks. I wouldn't be so sure the banks will win.

The CBA v Amadio case could be referred too except in this case the couple apparently took out loans covering five properties, meanwhile the Amadio case related to a person acting as security for her son only to face the loss of her home after he didn't cover his debts and as you mention the lady spoke little to no English.

This couple might be able to argue that the bank should have challenged them on their ability to cover those loans as they claim to being only a single income couple or as the Amaido case resulted the bank has to make sure the borrower understands the risks.

The reason why I think the bank would be successful is unless this couple can demonstrate some kind of unfair treatment by the bank when making the loans or in the way the bank sought to foreclose the loans because there are steps a borrower can take to head off foreclosure such as seeking to sell the properties.

 

[Number37]

The CBA v Amadio case could be referred too except in this case the couple apparently took out loans covering five properties, meanwhile the Amadio case related to a person acting as security for her son only to face the loss of her home after he didn't cover his debts and as you mention the lady spoke little to no English.

This couple might be able to argue that the bank should have challenged them on their ability to cover those loans as they claim to being only a single income couple or as the Amaido case resulted the bank has to make sure the borrower understands the risks.

The reason why I think the bank would be successful is unless this couple can demonstrate some kind of unfair treatment by the bank when making the loans or in the way the bank sought to foreclose the loans because there are steps a borrower can take to head off foreclosure such as seeking to sell the properties.

I don't disagree with that you're saying...I just think that in the current atmosphere and the history of higher court antipathy towards banks, I wouldn't be so sure that the bank wins this one.

It's a bit like that fat dude suing Maccas because the chicken nuggets should have been more healthy...but you never know.

 

[Kwality]

Opponents of the Royal Commission suggested damage to the banks might be reflected in the economy, seems the NSW & Vic treasurers are facing significant shortfalls in stamp duty revenue.

https://www.propertyobserver.com.au...nt-strategy/property-news-and-insights/96075-lower-stamp-duty-hits-nsw-state-government-revenue.html

https://www.macrobusiness.com.au/2019/03/stamp-duty-bust-triggers-victorian-budget-austerity/

The WA economy is battling after the end of the mining construction boom, is that where NSW & Vic are heading?

 

[MC Bad Genius]

Opponents of the Royal Commission suggested damage to the banks might be reflected in the economy, seems the NSW & Vic treasurers are facing significant shortfalls in stamp duty revenue.

https://www.propertyobserver.com.au...nt-strategy/property-news-and-insights/96075-lower-stamp-duty-hits-nsw-state-government-revenue.html

https://www.macrobusiness.com.au/2019/03/stamp-duty-bust-triggers-victorian-budget-austerity/

The WA economy is battling after the end of the mining construction boom, is that where NSW & Vic are heading?

Is that the fault of the royal commission though? Or of the unscrupulous behaviour of the banks that necessitated a royal commission?

 

[Kwality]

Is that the fault of the royal commission though? Or of the unscrupulous behaviour of the banks that necessitated a royal commission?

Quite right, apportioning blame is a waste of effort, any way you go it was predicted by some who were ignored.

 

[Pessimistic]

Westpac today claiming banks are not to blame for the housing price bust. Not sure they explained why the numbers are down if there’s an oversupply of stock

 

[Kwality]

Westpac today claiming banks are not to blame for the housing price bust. Not sure they explained why the numbers are down if there’s an oversupply of stock

Tightening lending does tend to douse the flames, IMHO the Shorten policy on negative gearing does nothing for capital growth.

 

[Maggie5]

The Morrison government, under heavy fire from politically influential mortgage brokers, has backed down on a key recommendation from the Hayne royal commission, and will no longer ban trailing commissions from 2020.

The flip was revealed by the treasurer Josh Frydenberg after a cabinet meeting on Tuesday. He told reporters the government had resolved not to prohibit trail commissions on new loans, but rather review their operation in three years.

The proposed review will be undertaken by the Council of Financial Regulators and the Australian Competition and Consumer Commission.

Frydenberg said the government changed its position because “we are concerned about the impact on competition in the mortgage lending market”. He said brokers played a “critical role” in the home lending market, and declared the government “stands side by side with mortgage brokers”.

I don't mind this so much but perhaps should put in some regulation and more transparency. Prefer Labor's suggestion though:

Labor has proposed a fixed-rate commission for mortgage brokers rather than accept the banking royal commission recommendation to apply user-pay fees to the service.

 

[Simon_Nesbit]

The Morrison government, under heavy fire from politically influential mortgage brokers, has backed down on a key recommendation from the Hayne royal commission, and will no longer ban trailing commissions from 2020.

The flip was revealed by the treasurer Josh Frydenberg after a cabinet meeting on Tuesday. He told reporters the government had resolved not to prohibit trail commissions on new loans, but rather review their operation in three years.

The proposed review will be undertaken by the Council of Financial Regulators and the Australian Competition and Consumer Commission.

Frydenberg said the government changed its position because “we are concerned about the impact on competition in the mortgage lending market”. He said brokers played a “critical role” in the home lending market, and declared the government “stands side by side with mortgage brokers”.

I don't mind this so much but perhaps should put in some regulation and more transparency. Prefer Labor's suggestion though:

Labor has proposed a fixed-rate commission for mortgage brokers rather than accept the banking royal commission recommendation to apply user-pay fees to the service.

We're getting closer to reducing the negative impact on the consumer.

The industry is already highly-regulated and transparent, indeed earning praise from ACCC and ASIC for its pro-active approach to self-regulation. There's been almost a decade of investigations and attacks on the Broker market, yet virtually nil in the way of evidence of poor behaviour/outcomes. If only the Banks were as tightly monitored there wouldn't have been a need for the RC at all!

Secondly, Labor's suggestion will simply lead to more expensive loans for all as Brokers now cannot provide ongoing service to customers without re-writing their loan, leading to further reduction of loan terms = more assessment and processing from banks to acquire the product, and less time to profit from their product (the consumer). It's a solid step away from an ongoing relationship business to a short-term transactional one.

What they should have done is eliminate referrers' entirely - immediately. Force them to become a broker, or give up being paid as if they are one or marketing themselves as if they are providing a service or advice.

They should have regulated "back book repricing" - already this has doubled, if not tripled my workload as lenders seek to profit of their current book in this time of broker uncertainty.

Then, short of separating the advice from the product (ie stop banks from lending directly) there isn't much else they can do to improve consumer outcomes.

 

[Maggie5]

We're getting closer to reducing the negative impact on the consumer.

The industry is already highly-regulated and transparent, indeed earning praise from ACCC and ASIC for its pro-active approach to self-regulation. There's been almost a decade of investigations and attacks on the Broker market, yet virtually nil in the way of evidence of poor behaviour/outcomes. If only the Banks were as tightly monitored there wouldn't have been a need for the RC at all!

Secondly, Labor's suggestion will simply lead to more expensive loans for all as Brokers now cannot provide ongoing service to customers without re-writing their loan, leading to further reduction of loan terms = more assessment and processing from banks to acquire the product, and less time to profit from their product (the consumer). It's a solid step away from an ongoing relationship business to a short-term transactional one.

What they should have done is eliminate referrers' entirely - immediately. Force them to become a broker, or give up being paid as if they are one or marketing themselves as if they are providing a service or advice.

They should have regulated "back book repricing" - already this has doubled, if not tripled my workload as lenders seek to profit of their current book in this time of broker uncertainty.

Then, short of separating the advice from the product (ie stop banks from lending directly) there isn't much else they can do to improve consumer outcomes.

You obviously are more informed than me but the point was that after all that enquiry is the answer - 'do nothing'?

Why would they have to re write loans, surely it wouldn't be retrospective.

Not sure what you mean by 'referrers'.

 

[Simon_Nesbit]

You obviously are more informed than me but the point was that after all that enquiry is the answer - 'do nothing'?

Why would they have to re write loans, surely it wouldn't be retrospective.

Not sure what you mean by 'referrers'.

There wasn't really any inquiry into Mortgage Broking - so yes, the recommendation should have been to "do nothing". The inquiry was into misconduct, and whilst 60% of the residential mortgage market, brokers receive <1% of complaints. The recommendations were essentially based on CBA noting that brokers "do nothing", "cost more than direct" (compared to a branch loan-writer salary only) and that their remuneration "could be" subject to bias against the consumer interest. The economic influences were never discussed, and Brokers were never given the chance to cross-examine as if a trial.

There's plenty that should have been done to the banks, but Hayne went with the wet lettuce leaf instead. He did however, (intentionally or not) try to wipe out the broker industry, and with them all lenders outside the big-4 who would lose up to 90% of their customer acquisition network.

Banks undertake "repricing" of existing customers - generally every 6-12 months there will be a rate rise - independent of RBA or any public uttering, just increasing the banks' margin on their existing clients. They know some will refinance, more will ask for a discount - but the huge majority will just suck it up. So the loan that was fantastic 12 months ago, is now barely competitive, and possibly better for you to refinance to a better rate. But it can be like trying to herd cats, as every time you chase the cheaper rate, that lender (having grabbed market share with a headline rate) now seeks to profit from their (recently new) client base.

Brokers are paid to write a loan that is suitable. If a client refinances, sells, cannot afford their payments and falls into arrears, etc - the broker loses some or even ALL of their income. The usage of the term of "trail" is actually quite misleading - the payment Broker's receive is actually a deferred payment of upfront, discounted based on the quality of the original loan written. This allows smaller lenders to be much more competitive, less able to cope with the increased initial acquisition costs than a big-4 competitor.

From the Broker perspective, it takes far longer to write a new loan, than to look after an existing client so the greater financial reward (better $$$ return on time) is to build strong relationships with existing customers.

Under the most recent proposed changes, Labor's 1.1% upfront will firstly see an income reduction of 20-30% across the industry (it's too low, should be 1.3-1.5), secondly - under this proposal brokers are now only paid for a new loan, so will no longer "look after" clients by managing and protecting them from their current bank - instead they will let the bank 'reprice' the loan over two years until it is uncompetitive, and then write a new loan - for the same customer, for the same house, for the same amount....to get a cheaper rate. Banks will thus increase their rates more rapidly, to profit before the loan is lost. All it does is add significant additional costs to the processing and acquisition of loans, whilst increasing the workload for all and shortening loan terms - leading to higher interest rates and fees as the banks try to make the same profit in a shorter time. Completely self-defeating and even Labor's economic advisors have told them this.

Referrers (or Introducers) were non-finance people who are paid commissions for providing leads to branch-based staff. These referrers were often simply a marketing tool - gym owners, sports clubs, anyone with an existing membership that could be "sold". Even coffee shops were getting paid 0.5% for a name and number. No responsibility, no obligation to even disclose they were paid in some cases. This was one of the few areas that had significant concern, which was quickly lumped under the "broker" banner by NAB, CBA and ultimately by Orr and Hayne.

 

[Simon_Nesbit]

"politically influential mortgage brokers" = John Symons.
Fees paid to anybody MUST BE TRANSPARENT. Trailing commissions are NOT transparent and never will be because they are designed not to be transparent.
Other than the say so of mortgage brokers, there is no evidence that mortgage brokers provide competition in the mortgage market.

I honestly cannot fathom how someone can come to that conclusion - any review of ANY of the economic rationalisation (other than that from or funded by the big-4) have comprehensively proven the increased competition.

ASIC, ACCC, Deloitte, Treasury, etc, etc. Anything that looks at actual statistics falls in favour of Mortgage Brokers.

Mortgage Brokers write 60% of all loans, and even now write about 40% of those with the Major banks (24% of entire market), but the 36% of loans written through the non-majors account for almost 90% of all loans written by non-big-4 lenders. Remove Mortgage Brokers and the big-4 will return to their >90% Oligopoly.

The Broker Market is now 60% of the entire market and growing by 1-2% per year. Showing a >90% satisfaction rating, with a similar percentage planning to use a Broker next time. For the banks it's now 30% and 25% respectively. The only profile that still prefers banks are in the 50+, (whilst the youngest are roughly equal with Brokers/Online). The direct channel was (is) dying - this was an opportunistic attempt to try and keep their power over the public.

Luckily (for everyone) the spotlight has merely exposed some of the good work Brokers have achieved.

Remove Mortgage Brokers, and you essentially remove all non-big-4 options from a very large percentage of the population. It's absolutely anti-competitive.

 

[Simon_Nesbit]

TLDR version:

With Brokers: Big-4 write 60% of all loans.
Without Brokers: Big-4 write 90% of all loans.

 

[Simon_Nesbit]

That contradicts what you wrote in your previous post.


A customer can negotiate with the bank on 'repricing'. By your own admission some do. In theory every customer can.
A customer that engages a mortgage broker benefits because the mortgage broker saves the customer the trouble of negotiating with the bank.
The customer does not directly pay the mortgage broker, the mortgage broker is paid by the bank.

What is the mortgage broker doing that increases competition? Smoke and mirrors?
For this reason most of the rest of your post is somewhat misleading.

A single customer may not pay the broker, but customers as a collective do indeed pay the broker. The banks build the mortgage broker's fees into their margin. The customer pays the margin. Indirectly the customer pays the broker.
The customer accepts on good faith that the mortgage broker will act in their best interest.
Where is the safeguard for the customer that prevents a mortgage broker from not acting in the customer's best interest?
There isn't a safeguard.

On top of there being no safeguard, the broker can directly benefit from not acting in the customers best interest. For example: The customer's original loan was 4%. The bank can go as low as 3.5% but the broker settles for something more than 3.5%. What's stopping the broker from settling for 3.55% or 3.60% or any other number below 4%.
Given the apathy of customers that you have already outlined, it's easy money for the broker. The customer thinks they're getting the best deal, but they're not always. They might still be getting a good deal but it is not the best deal.

Another point:
A mortgage broker acts as fiduciary, in every other fiduciary relationship, there are safeguards. There are no safeguards in the mortgage broker/client relationship...other than the goodwill of the broker.

The entire relationship between the customer, the broker & the bank is based exclusively on goodwill.There is broad scope for the relationship of the broker with the bank to override the relationship of the broker with the customer. The previous pay structure made it easy for the bank to incentivize the broker to act in the best interests of the broker and the bank, to the detriment of the customer.
Who is better for the broker to maintain a symbiotic relationship with, the customer or the bank?
The broker can always get new customers, there isn't that many banks to choose from.

Smoke and Mirrors in the banking industry is actually what created the opportunity for Brokers to begin with. Broker clients are generally more aware of their financial position, what is available in the market and whether they are getting a good deal. If Banks simplified their requirements, stopped excessive profiting off their existing client base and were open and honest - the broker industry would be decimated (and it wouldn't necessarily be a bad thing, as simpler banking with greater transparency would allow greater fluidity and access to the non-Majors, ie via online).

There are lots of different aspects at play, but for simplicity lets look at the "whole" and the "individual".

From the Lender's perspective, it generally costs more to acquire a loan through their direct channel than it does through a broker, with estimation that a full-time branch loan writer, operating within a branch would write roughly double the amount of business as a broker, with the equivalent direct costs calculated to around $5000 per loan. (This led to the 5-6k per application being bandied around early on). Cheaper for those Lenders with long established branches (ie big 4), more expensive for those with less. This ignored the marketing costs, presuming all flows continued regardless (likely due to simplicity).

In terms of Market penetration, the MB industry is valued roughly equivalent to about 700 bank branches - essentially any lender with less branches benefits, whilst those with more branches have their competitive size advantage eroded.

So on a "whole" basis, MB is very much pro-competition.

From an "Individual" level, the reasons given for using a Mortgage Broker are varied, but the most common are with regards to saving time, better education and understanding (for consumer and MB alike), better access to support and finally price.

I don't think you understand how Brokers are paid. The rate you get has no influence on how much they are paid (other than niche lending such as non-conforming or business lending). A broker has no reason to take anything other than the best rate available - they are paid the same regardless, and do not get paid if you go elsewhere. Ironically, until recently this wasn't true of the direct channel, with many loan officers and branch managers bonuses including a factor for how far above the minimum rate their portfolio sat. By the way they are remunerated, Brokers are 'forced' to align their interest with the consumer.