March 20, 2019 by Dymphna

Broker win is market’s gain

It was a change no one was calling for, but now that it won’t happen, what does it mean for the market?

Mortgage Broker’s have had a win.

When Kenneth Hayne delivered his Royal Commission into the banking sector, he recommended that mortgage brokers be moved to a user-pays system (as opposed to the commission-based system we have now).

That’s what he recommended, but it’s just not going to happen.

Last week, both Labor and the Government said that they’re down with most of his recommendations, but aren’t that keen on that one.

Actually, of the 76 recommendations he made, this looks like it’s going to be the only one not implemented.

Nice work, brokers.

It’s the fruit of some handy lobbying, no doubt, but I think most Australian’s were surprised to see brokers on the hit list.

The Royal Commission dug up hundreds of examples of banks and financial services firms duding their clients. Mortgage brokers barely rated a mention.

But in some ways, they just ended up being collateral damage. When Hayne dug into the reasons why so many people received such poor financial advice, a common cause was “conflicted remuneration”. That is, many financial advisers were paid a commission on the financial products they sold. They became incentivised to sell products, not deliver results.

When the bank is footing the bill, there’s a conflict of interest.

And since Hayne was looking at the entire financial services industry, when he looked at mortgage brokers, he found that they had the same remuneration structure (the banks pay the commission, not you), and since that was a problem in principal, it should be changed in particular.

… even though no one was really that worried about it.

And so that’s where recommendation 76 came from.

But now the industry has lobbied against it, and it doesn’t look like it’s going to happen.

And I think that’s probably a good thing. The reality is that mortgage brokers do play an important role. In a very confusing market, people really do benefit from an intermediary who can find them the best deal.

Without brokers, I think people would probably get worse outcomes, and the market would be less competitive overall.

It would tilt the balance of power away from consumers and back to the banks. I don’t think that would be an improvement.

But I also find it interesting to think about the implication for prices.

One thing mortgage brokers do is help buyers figure out the most they can borrow – not just from individual banks, but from the collective pool of lenders.

So if brokers help individual borrowers access more credit, then collectively the mortgage broking industry helps the market access more credit in aggregate.

And since it’s credit that buys houses and determines prices, more credit means higher prices.

And so it follows that if you got rid of mortgage brokers, there’d be less credit in the system, and prices would fall.

So, probably a good thing that it’s not happening hey?