The Banking Royal Commission has been the talk of the town of late. Some people are heralding the investigation as one of the best things to happen to the financial services industry, while others are concerned the findings, if implemented, could serve to further bolster the banks’ coffers rather than those of the people it was intended to protect: consumers.
But what does it all mean for you, and how are the findings of Royal Commission going to impact your chances of buying, and building, your dream home? We caught up with FinancePath directors Chris Collard and Mark Attard to find out exactly what the Royal Commission means for home buyers and, by extension, the wider building and finance industries.

WHAT WAS THE BANKING ROYAL COMMISSION FOR?

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – otherwise known as the Banking Royal Commission – was established by the Australian government in December 2017 to investigate the potential misconduct and culture of greed within Australia’s financial institutions. Honourable Justice Kenneth Madison Hayne AC QC conducted the report, which saw seven rounds of public hearings held over 68 days, called more than 130 witnesses and reviewed some 10,000 public submissions. The final report, which totalled 936 pages and included 76 recommendations, was released to the public on February 4.

WHY DID WE NEED TO HAVE IT?

The idea of the Royal Commission, FinancePath director Chris Collard explains, was to make enquiries into perceived misconduct by the big banks and within the banking and financial services industries. “There were a number of examples presented to the commissioner about banks charging people for no service, not making reasonable enquiries into clients' financial situations prior to providing access to credit and instances where bank staff' interests were not aligned to ensuring good consumer outcomes,” he says. “The whole point of the Royal Commission was to ensure that our financial institutions are geared and motivated to providing good outcomes for their clients”
 

WHAT WAS THE BIG DEAL ABOUT IT?

Not only was the Royal Commission needed, Chris says it was long overdue. “It had been pushed by the opposition for a number of years now,” he says. “The Liberal party believed we didn’t need one; however, the Turnbull-led government eventually agreed to back the Royal Commission and it has since been acknowledged that it was definitely required. The findings of the Royal Commission and case studies that were presented have justified its existence. No doubt the culture and practices within the major financial services had to change and that has been noted in a large majority of recommendations.”
 

THE BROKER BACKSTORY

Four score and 20 years ago, Chris says, banks used to distribute their products via branches, with bank managers as the main conduit between you and a home loan. Our parents, for example, went cap in hand and said ‘can we please have some money’ and would do whatever the bank said.
“Back then, banks operated on higher margins," Chris says. "For example, let’s say they could get access to money at 3% however they would lend out at 6%. They could do this because there was no or little competition in the market,” he explains. “Then Aussie Home Loans, Wizard Home Loans with Mark Bouris, Rams and others came on the market and realised they could secure funds at effectively the same rate as the Big 4 banks but, unlike the banks, they didn’t have the huge infrastructure and costs associated with distributing those funds. Those businesses focused on securing the funds and packaging up loan products."
And so began the evolution of mortgage brokers. With these new lenders acquiring cash at basically the same rates as the banks, they were still able to build margin into their products - enabling them to pay brokers to distribute their products to clients - while still lending out at cheaper interest rates to clients than the banks.
“Brokers brought competition to the market and provided access to more lending options for clients," Chris says. "Eventually, the banks began to reduce their margins and make their products available to brokers, too.”

 

KEY RECOMMENDATIONS FROM THE ROYAL COMMISSION

Recommendation 1.1: The NCCP Act (National Consumer Credit Protection Act)


Translation: Lenders can’t provide finance that, at the end of the day, they deem to be unsuitable.
What it means for you: Tightening of credit policy, increased scrutiny around applications for finance and, in many cases, reduced borrowing capacities.
Analysis: This recommendation relates to responsible lending and had been pre-empted by the financial services industry, which had already started self-regulating.
“Scrutiny around responsible lending has been in place for the last six months,” Chris says. “There has been tighter assessment of client spending and a tightening of credit.”
Lending responsibly means further due diligence, adds Mark Attard. “If anyone has applied for finance over the last six months they would have experienced this,” he explains. “They would have experienced more paperwork because we have to do more due diligence into, primarily, what it costs you to live. If there is more paperwork to assess, it takes longer to get approval. We’ve seen this with the lenders – it’s taking them a lot longer to work out if they should lend you the money and, if they are going to lend to you, how much.”
This rigour around personal spending and living expenses has also impacted how much credit banks or lenders are actually willing to hand out. “We’ve seen borrowing capacities reduce by about 30%,” Mark says. “If you could borrow $700,000 a little while ago it’s now down to about $500,000 – depending on how much your statements show you are spending as living expenses.”
“I have no objection to the recommendation that there be greater scrutiny around whether a client can afford to or should borrow the amount of money they are applying for,” Chris adds. “If the outcome is that we capture more people who maybe should not be borrowing – that’s the responsible thing to do.”
 
MORE: BENEFITS OF BUILDING OVER BUYING EXISTING PROPERTY

Recommendation 1.2: Best Interests Duty


Translation: Mortgage brokers must act in the best interests of the client – being the intending borrower.
What it means for you: Increased integrity when it comes to product recommendations, customer service and future planning.
Analysis: When looking through all of the research and testimony he conducted as part of the royal commission, Kenneth Hayne said it wasn’t necessarily implied that a mortgage broker was acting in the best interest of the client, Mark explains. The suggestion was that if the lender was paying the mortgage broker, the mortgage broker might be more inclined to recommend the product with the highest commission, regardless of whether it was the best fit for the client’s needs.
“The fact is, a mortgage broker needs to meet responsible lending requirements,” Mark says. “This means they need to match not only the product features of the loan to the short- and long-term goals of the client, but also need to know the client to a level that they understand what might happen in the future to ensure the product recommendation will remain suitable if their circumstances change.”
Adds Chris: “We are mandated to ensure that we are matching features and products with clients’ needs as part of responsible lending obligations so if the impact to the industry is that some brokers aren’t happy and want to get out of the market, my view is great... Good riddance”
 

Recommendation 1.3: Mortgage broker remuneration


Translation: The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.
What it means for you: Client (that’s you) to pay the Mortgage Broker’s fee upfront – just like you would a lawyer or conveyancer.
Analysis: This is the big ticket item that has caused a lot of the noise, Mark says. “There are two ways in which we get remunerated in this industry – an upfront payment and an ongoing payment. The first one that is being tackled is that upfront payment. The recommendation is that the upfront payment is no longer to be a commission paid by the lender but a fee paid by you, the client."
In the report, Hayne recommended that the person who is getting the service – ie, the client – should be the one who is actually paying for that service – as opposed to the bank paying the broker.
“The biggest issue with this is there is a disconnect between what research has indicated you, as clients, are prepared to pay and what lenders are prepared to pay for distribution,” Mark explains. “They’re totally different numbers. The processing fee of a file versus what research says people are prepared to pay does not match up and does not cover costs.”
That means that if this recommendation is adopted, it could see the mortgage industry shrink as smaller firms struggle to survive on a flat fee structure.
“If there are less brokers in the market, it will drive people back into branch world because that’s what they’re familiar with and that’s where they’ve got a bank account,” Mark says. “If they don’t go into a Big 4 branch, they’ll go into a second tier bank that is probably owned by a Big 4, or they might jump online and apply with an online lender, which is probably funded by a Big 4 bank or they’ve got a share in so ultimately the banks get ahead.”
Competition only exists when competition has scale, Chris adds. “The amount of loans introduced to banks from the broker network accounts for nearly 60 per cent of all loans. That competition has a voice with the banks and can dictate to banks that they have to be competitive on price, product and features because we deliver 60% of the business to you. Now if that competition is down to 20%, for example, it clearly doesn’t have as great an influence or as much competitive buying power."

Recommendation 1.5: Mortgage brokers as financial advisers


Translation: Mortgage brokers should be subject to and regulated by the same law that applies to financial advisers / entities providing retail products (in this case, loans) to clients.
What it means for you: Mortgage brokers to be held accountable for the advice they give.  
Analysis: This recommendation is around making sure mortgage brokers are held to the same standards as any other financial advisers. “If we’re giving personal advice of any nature – we have to be held to the same standards,” Chris says. “We welcome this recommendation as it is going to lift the standards of the whole broking industry. If we’re held to the same standards as financial planners in terms rigour, questioning, research and cost benefit analysis - education standards will lift and people who don’t want to move with the times will exit the industry. Once again – we welcome that."

To find out more about your borrowing capacity, or to speak to a mortgage expert, visit financepath.com.au or call 1300 780 440



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