The MFAA’s lobbying strike against Hayne’s recommendation that broker commissions be abolished – and replaced by a conflict-free user-pays pay model – was swift, and highly effective.
The government started softening its rhetoric even before the final report was released, repeating the industry talking points of negative “competition” impacts if broker commissions were reformed.
Opposition Treasury spokesman Chris Bowen, however, vowed he’d need a «very, very, very good reason» to reject any of Hayne’s findings. But last Friday, Bowen announced Labor’s spectacular backflip.
On the upside, Labor will fall into line with both Hayne and the government by agreeing to, from 2020, abolish broker trailing commissions on new home loans. Trailing commissions are ongoing payments from lenders to brokers worth about 0.2 per cent a year of every home loan they arrange. Hayne slammed such payments as “money for nothing”.
Labor has also agreed with Hayne and the government to subject brokers to the same tougher “best interest” test that applies to financial advice, rather than the current test that loans simply be “not unsuitable” for borrowers.
But after the abolition of trailing commissions, Hayne also wanted upfront commissions abolished too, over a two-year period. The government has promised only to review upfront commissions three years from now. Labor promises a review too. In an effort to look tougher than the government, it has, however, drafted its own policy on upfront commissions.
Talk about policy on the run.
If elected, Labor will force all lenders to pay the same upfront commission to brokers, removing one way lenders might seek to get brokers to direct more business their way, by paying a higher commission.
Currently, these upfront commissions already cluster around 0.6 per cent of a loan’s value, with only minor variation between lenders.
Without trailing commissions, brokers argued they would need a higher upfront commission to cover costs.
Labor hasn’t officially put a figure on it, but Bowen has indicated a figure of 1.1 per cent might be in the ballpark.
Hang on, did brokers just get to almost double their upfront commission? Happy days! Gold plate that lobby group of the year award and send it straight to the pool room!
Most concerning, however, Labor’s policy does not remove perhaps the most pernicious conflict of interest in broking: that brokers have a financial incentive to push people into bigger loans, because it inflates their commission.
Brokers in salubrious suburbs must surely be cheering Labor’s policy. For arranging a $1.5 million mortgage, they will still get to pocket triple the commission of a broker arranging a similar $500,000 loan in the outer suburbs.
Labor says the best interest test and responsible lending laws will prevent any debt pushing. But the financial incentive remains for brokers to arrange bigger loans.
Hayne’s proposal for a flat upfront fee, paid by borrowers to brokers, would fix all that.
In Hayne’s world, seeing a broker would be just like paying for the trusted advice of a doctor, lawyer, or accountant – something Australians seem only too willing to do.
Except unlike those professions, when you see a broker you also happen to be in the process of getting a massive loan, onto which you can just add the cost of advice and pay it off over time.
There is no reason to believe that, under a user-pays model, the broking industry would be decimated to anything like the degree they have claimed.
History will judge both Labor and the Coalition for squibbing it on mortgage broker reform. The broking industry will be judged poorly too.
Truth is, many Australians do need help navigating the daunting prospect of applying for a loan and finding the cheapest and best deal.
There is a role for a professional, high-standards mortgage broking industry, committed to providing independent advice, free from both perceived and real conflicts of interest.
Surely some leaders within the broking industry itself must feel uncomfortable with their association’s tendency towards histrionics, rather than engaging in a sensible political and policy debate about how their industry can be put on a more sustainable path to being a truly conflict-free and trusted profession.
Both mortgage brokers and borrowers deserve better.
Jessica Irvine is a senior writer.
Jessica Irvine is a senior economics writer with The Sydney Morning Herald.