The next steps

by Melanie Mingas06 Jun 2019

The election may have delivered for brokers but the 2022 review, best interest duty and threat of a downturn, remain on the cards

It has been dubbed the ‘Morrison Miracle’ – a shock election win that defied the opinion polls. But while the nation continues with business as usual, many are celebrating the start of a new era.

“It’s what we were hoping for, a best-case scenario,” says Connective director Mark Haron.

“The bottom line is there was a fundamental difference between the Liberal policies around mortgage brokers and the Labor policies. From an industry perspective, from a mortgage broker perspective, having the Liberals winning this election means that for the next three years … they will not be banning the trail commission, which was a fundamental difference with Labor.”

Haron isn’t the only one breathing a sigh of relief.

Regardless of political persuasion, the result was the one brokers across Australia were looking for.

“The three-year review provides a process to extinguish, once and for all, any further debate around the current model” David Bailey, CEO, AFG

However, as MFAA CEO Mike Felton reminded the industry in a letter issued on 20 May, there is work still to be done.

“Now is not the time to rest on our laurels. If we’re going to continue to be an industry with outstanding data on customer satisfaction and growing market share, we must continue to reform and evolve,” Felton wrote.

Are brokers off the hook?

While remuneration is safe for now, the introduction of a best interest duty and a review of remuneration in 2022 remain on the table.

When it comes to the actual business of broking, FBAA managing director Peter White has already observed an impact on both new-to-industry and veteran brokers.

He says the consequences of another review are already being felt in investment and innovation.

“Having that hanging over us has had an impact on people coming into the industry, and established brokers aren’t investing in their businesses as they should because they don’t know what the future looks like,” he says.

“That recommendation must go. It’s holding back and in part destroying the industry because of the uncertainty it causes.” Further issues remain around who will conduct the review.

“The royal commission wrote it in a way that says it would be a review by the Council of Financial Regulators and the ACCC to look at moving things to a consumer-pays model, so fee-for-service; that is in principle the directive they have been given. I said it to both sides – that has to go,” White says.

However, for AFG CEO David Bailey it could also be an opportunity to lay old demons to rest.

“This is where we still have a lot of work to do, and why we will still have consultants working for us from a lobbying perspective” Mark Haron, director, Connective

Bailey has pledged that AFG will remain “at the forefront of consultations” during the review process; his goal is to ensure that industry voices continue to highlight the benefits of an active third party channel.

“The three-year review provides a process to extinguish, once and for all, any further debate around the current model,” Bailey says.

“To my knowledge, no other industry has ever gone through such an extensive analysis of how it is remunerated. To borrow a phrase, brokers are not from the top end of town; they are small businesses, which are the heartbeat of our economy.

“Constant analysis and the ensuing paralysis is not good for any business, let alone small business operators who have enough stresses in their working life without constantly being challenged around how they are remunerated.”

What also needs to be considered is that three years brings us conveniently to the next election cycle.

“Effectively what they are saying is that we will look at it next time we are elected. It’s well and truly kicking the can down the road, so to speak,” says Trail Homes founder Nick Young. However, Young maintains that linguistics are key to determining the extent of the review.

“What this really seems to say is that we aren’t going to do an inquiry; a review means we are happy to continue as we are today. We will review the mortgage broking industry and come back to this, but if the industry continues to perform in the wonderful way it does, then there is no reason why it shouldn’t continue with the same remuneration arrangements that we currently have in place,” he says.

Proving best interest

As Australian Broker reported in February, the introduction of a best interest duty may be a welcome opportunity to prove value, but it’s not as easy as it first sounds. Labor’s response to the royal commission stated the duty would be introduced “as a matter of priority”.

Although no such statement has been made by the Coalition, it has yet to be ruled out.

“We can now concentrate on this very important issue, and if it is done well the discussion and conclusions and changes that are put in place will truly benefit everybody. Consumers, lenders, brokers can all end up with a better playing field,” says Young.

“If it is not handled well, we could end up with a bit of a mess.” He adds that the issue has not received nearly as much attention as it warrants.

In 2016, Canada’s regulatory body, the Canadian Securities Administrators, announced it would introduce a best interest standard after a four-year investigation exploring how the requirement would alter the market.

Within two years, each of the country’s regional regulators had scrapped the duty, having failed to define “best” or sufficiently demonstrate how the value judgment could be enforced.

The challenge is the concept of principle- rather than rules-based regulation, and for Samantha Gale, CEO of the Canadian Mortgage Brokers Association in British Columbia, it raises more questions than it answers.

“When you’re talking about the ‘best’, it’s just an impossible standard. How are you supposed to nail down all the options? Not having the duty in place does not mean that people aren’t going to get the best advice in any event,” she says.

For Gale, there are several key questions around best interest: What does it mean? What does it look like? Is it doable? Does it compromise the actual goal?

“If you make something too difficult, then people are not going to service their clients very well at all,” she says. Her concerns are echoed in Australia.

However, White says the real catch 22 occurs when clawbacks are added to the equation.

For example, moving lenders in month 14 in the interests of the client would cause the broker to suffer a clawback as a result. “There is a lot of work to be done on the best interest duty.

There are things we need to watch in how this plays out,” White says.

In a webinar held on 23 May, Connective advised its brokers to consider covering this eventuality with a one-off fee.

“Effectively what they are saying is that we will look at it next time we are elected. It’s well and truly kicking the can down the road” Nick Young, founder, Trail Homes

According to Haron, the duty could have far wider impacts, and his concerns extend to brokers being liable for advice. Connective’s position is that the necessary work to define and implement best interest cannot just shoehorn FOFA reforms into the broker channel.

“This is where we still have a lot of work to do, and why we will still have consultants working for us from a lobbying perspective in Canberra, to ensure that the best interest duty plays out in a way that continues to protect the structure of the industry,” Haron says.

“The worst thing we could have now is a best interest duty that stifles or reduces the desire for banks and mortgage brokers to help customers borrow money.We need to get the economy going a bit more again.”

Fresh sentiment

The final piece of the puzzle is the economy; specifically, the role of the property market within it. While Labor’s policies on negative gearing, franking credits and taxation will remain on the shelf for now, issues remain for the Liberal-led Coalition.

“There is no doubt the Coalition’s policy position provides greater certainty for Australia’s mortgage broking sector and home loan customers,” says Bailey.

“Uncertainty creates inertia around investment and growth and discourages new entrants.With the Coalition retaining government, we now have an opportunity to move forward with more clarity and certainty.”

The week before the election the Housing Industry Association called for action to address the domino effect of a tighter credit environment.

HIA research reveals that the market is currently experiencing the lowest home construction levels since 2013 and a 19.4% drop in finance commitments for the construction and purchase of new homes.

There was also a nationwide drop in lending to owner-occupiers in the three months to March.

While the government’s First Home Loan Deposit Scheme has been welcomed by many, much more will be needed to boost activity, specifically around the availability of credit and the supply of new, affordable homes.

With an elected leader and government now firmly in place, the formula says market sentiment should start to recover.

To help things along, while the election results were still being counted APRA announced it would potentially defer serviceability calculations back to lenders.

However, with fear of a recession simmering away and interest rates inching closer to a cut, there’s an expectation of more chaos before there is calm.