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I’ll huff and I’ll puff and I’ll…

Date: 06/02/2019

He rode into town with a huff and a puff, but in the end, no house was blown down.

That’s my summary of the Royal Commission into the Banking and Financial Services Industry.

Stories of charging dead people fees, rampant greed, corporate misconduct and much more resulted in 76 recommendations, but none of them ground-breaking nor revolutionary. Perhaps the best result that emerged was the public shame that occurred during the hearing. In the aftermath, powerful lobby groups will likely be working overtime to argue for no change.

In some ways, given the financial resources of those it implicated of misconduct, it is a tap with a velvet sledgehammer (with the possible exception of the few criminal and civil trials that, if they happen, will take years to action).

In the hands of a government that didn’t want the report in the first place, there is no political ruin arising from it. Federal Treasurer Mr. Josh Frydenberg, like an exasperated parent who has lost control of an errant child, released a benign tongue-lashing that is more bark than bite.

A Difficult Job

To be fair, His Honour, Commissioner Hayne, and his team of helpers, had a very, very difficult task. As noted in the report, “Not every complaint that was made could be publicly examined. There were too many to do that.”

Gosh… too many to hear? Sounds like the Libs succeeded in scoping the enquiry to be so wide as to make the task of doing it properly, with the time and resources available, nigh on impossible. Who’d have guessed that when they begrudgingly agreed to the review in the first place?

Sandwiched between extremely well-heeled entities hopelessly blinded by greed, and regulators so overworked and under-resourced as to be tossed in to the ring with both hands tied behind their backs, it is unsurprising that the findings centred around two core principles – entities need to do better to care for their customers, and regulators need to do better at regulating.

Neither is likely to happen for long.

After the minimum possible period of contrition, the mighty pulling power of making money will again see consumers and customers compromised by greedy organisations that care more about profit than people. At the same time, regulators may receive a temporary bump in funding to levels still lower than they used to be, until inevitable budget cuts will force them to return to a ‘run on the smell of an oily rag’ operation.

What Will Change?

In the near-term, the answer is nothing. Most of the recommendations require changes to law, and with only a few sitting days of parliament left until it shuts up shop prior to the next election, it will be for the next government to roll out. With the housing market on the skids, and the economy likely to stall, there will be bigger fish to fry.

The one big change that might happen, eventually, is Recommendation 1.3:

The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.

In other words, consumers may have to pay some, or all, of the fees paid to mortgage brokers for their help in finding and obtaining a loan, if a user-pays system is implemented.

If you don’t know, presently mortgage brokers are paid by the lender. This means that the client pays indirectly through either loan application fees, or via the interest rate charged on the loan. 

I suspect this will be the death knell to the mortgage broking industry as we know it, and, in a reversal of what happened in the 1990’s, large financial institutions will upscale in-house loan services to offer ‘free assessments’, and pay the higher overhead from the money they’ll keep rather than paying third-party brokers. It might be more transparent, but will it be better? I doubt it. Small to medium mortgage brokers simply won’t survive and they will need to find employment elsewhere. I note in particular Recommendation 1.5: 

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.

This will require that mortgage brokers will have to ‘know their clients’ and provide ‘statements of advice’ similar to what financial planners have to do now. Sounds good but will add a lot of time, cost and administration that small businesses won’t be able to absorb. 

Aside from that, most of the recommendations relate to businesses being forced to have better moral consciences and regulators to have better regulating. No more blind eyes on either side.

Conclusion

I can’t help thinking the real damage done to the perpetrators of industrial-scale corporate greed and financial malpractice was the daily interrogation in the court of public opinion. Watching them squirm, their humiliation, their incompetence, their hubris and the embarrassment and erosion of their highly-prized goodwill that came from the public hearings was surely worth keeping the show going for a while longer. 

With the report released, an election some way off, and the disruption of a possible change of government, this will likely mean many months will pass before the issues highlighted in the report are revisited. And as we all know, justice delayed is justice denied.

You can read the Royal Commission’s report in full here:

https://treasury.gov.au/publication/p2019-fsrc-final-report/

 

Profile photo of Steve McKnight

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.

Comments

  1. Andrew Pitt

    Excellent analysis – thanks Steve
    Leading on from the big bad wolf analogy – i guess we property investors must be the pigs.
    And the straw houses?
    That must be the mortgage brokers.

  2. Profile photo of Claire

    Unbelievable. The only people who will be punished are mortgage brokers and that actually benefits the banks by not having to pay commissions.

    Not that we should be surprised at any of this.

  3. Mark

    Interesting to see how Labor will utilise the report and particularly the lack of action as an advantage over the current Liberal federal government – a distraction from the concern over proposed Labor policies e.g. franking dividends etc

  4. Profile photo of LIncs

    Mortgage brokers have an important role to play and help inexperienced home buyers work out the loan process. There may be some brokers which are using fraudulent documents to get loans but rather than throwing out the rotten apples, the commission is recommending closing down the whole industry. It is very unlikely that people will pay for mortgage brokers from their own pockets.

    • Norman Taralrud-Bay

      There are many conscientious brokers who provide a valuable service. Banks will never discuss other lenders’ products and it becomes easy for the majors to align with each other on pricing, meaning the customer has nowhere to turn to for advice on product features and service comparisons. Many borrowers will again be misssold 3o year P and I mortgages with no advice on how to save interest by prepaying a part of the mortgage early, so will end up paying the principal twice – once being the cumulative interest$$!

    • Satish Chandra

      Agree, IMO not many would approach a broker if they have to pay a fee up front. I have used brokers several times and the ones I used were real professionals. Banks indirectly pushed me to go to brokers as they were not receptive when I approached them directly. In the days of everything linked to bonuses or read money, it’s human to look for shortcuts to make money and that’s how the whole industry works. Corporates work for shareholder interests rather than customers and I feel only casualty of this would be mortgage brokers..

  5. Philip Wong

    In all this kerfuffle during and post Banking Royal Commission there is a lot of negative talks around the banking conduct but not one single report or talk on caveat emptor. It is so easy to relegate responsibility to organisations when things go wrong. Has anyone mentioned the many millions of people who are home owners because they were able to borrow from lending institutions? Has any commentator even mentioned the many millions of people who have gotten rich from property ownership?

    Whatever happened to balance reporting?

    As a frontline banker who has to raise a young family, I value my role and love our customers. My colleagues and I are copping the brunt of the community’s anger. You have no idea how much compliance and procedures we have to follow just to stay employed. The over the top compliance is starting to impact our customer service perception.

    Whilst I feel sorry for those people who have suffered as mentioned in the Royal Commission, I feel the pendulum of public sentiments have swung too far against the banking industry. There ought to be a reasonable level of self reliance and responsibility. It should be up to every individual to know what they are getting into and not rely solely on regulations to protect them.

    We all need to use more common sense.

    • Profile photo of Benny

      Hi Phillip,
      >>> “In all this kerfuffle during and post Banking Royal Commission there is a lot of negative talks around the banking conduct but not one single report or talk on caveat emptor. ”
      Umm, could that be because the Royal Commission was started for the very purpose of highlighting errors made by members of the Finance Industries (including Banks)?

      Any person in any Frontline is always going to cop it from disgruntled customers (initially). Perhaps the best we can all do in a similar situation is to “delegate upward”. i.e. Help the disgruntled customer by having them sit down with a superior where they can vent, and the superior can (or might) do something to assist.

      What you say is true – many people have made lots of money from taking out loans, but often that is in spite of Banks, and not so much because of them.

      Where Banks let down people who are dependent on them to “be fair”, they DESERVE a shellacking in my book. You mentioned “people need to take responsibility for themselves”, and yet some of the most widely reported errors by the Banks in this whole debacle were charging dead people fees for service, and over-selling to people who were mentally impaired and not able to be overly responsible.

      I don’t blame you for supporting your own industry Phillip – just don’t forget the little guy once you have become more senior !! ;)

      Benny

    • Profile photo of Jason Staggers

      Thanks for sharing your thoughts Philip. In one sense, I agree that people should take more responsibility for their own risk assessment, hence why Steve and I do what we do. That said, in the current balance of power, who do you think is better equipped at assessing risk? Banks or the average home buyer?

      Most people assume that the bank wouldn’t loan them money if they couldn’t afford to repay it. They think banks are assessing the borrower’s risk, when in fact they are assessing the lender’s risk.

      I’d be fully on board with your view if every loan came with a statement from the bank that reads something like, “We have approved your loan because in a worst-case scenario, we are confident we will get our money back. You, on the other hand, in the same scenario, would experience a very high degree of financial and emotional pain. You are responsible to assess your own risk. We value you as a customer, but we value our shareholders more.”

      I understand that would make closing new loans a challenge. My point is that if banks want to highlight caveat emptor, they need to take more responsibility themselves for educating unwitting borrowers. I’d prefer that over more regulation.

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