There are at least two great mysteries concerning Australia’s basically unregulated mortgage broking industry:
1. How it has managed to get away with negligible supervision when mortgage brokers deal with by far the biggest financial transaction in most consumers’ lives; and
2. Whatever possessed Australia’s big banks to hand over their most valuable assets – their customers – to third parties.
The latter mystery is easier to explain – the banks were going through a particularly mindless period of cost cutting, branch closing and power centralising, so thought they could save a few bucks by letting brokers do their mortgage flogging for them. Now that banks realise the customer relationship is actually important to business, the brokers are too powerful to be brought under control.
But the banks are beginning to learn another painful lesson. When you outsource to operators in an unregulated business, you will end up dealing with a percentage of shonks who will end up embarrassing you anyway.
That’s a little bit of what’s foreshadowed in Ben Hills’s Saturday Smage piece on one mortgage broker who convinced a number of clients to refinance, taking out loans for close to the full value of their homes and investing those funds with the broker. No prize for guessing the “investments” fell over, leaving the clients in a range of states from destitute to desperate.
Beyond this one shonk and the reported lack of police or ASIC interest in investigating his apparently fraudulent activities is the bigger question of the role of the banks – ANZ and NAB in this case – who happily dealt with the dodgy broker and trusted his dubious loan applications and are now evicting victims to get their money back.
And beyond this cruel individual case there are other brokers exploiting clients – the banks’ clients once-removed – with a variety of rorts. Most brokers are straightforward business folk, but inevitably a lack of regulation by the watch puppies and supervision by the banks will attract a fair proportion of shady operators.
For example, one of the more lucrative games around at present is to become both a mortgage broker and “financial planner”. You may have a client who has their house substantially paid off, but you advise them to mortgage it to the hilt (which earns you a fat trailing commission) and invest the funds in the products you sell (which earn you more fat trailing commissions).
In rising markets, it can work in the client’s favour. When real estate or stock markets tank though, well, it still works in the broker’s favour and that seems to be all that counts.
And who’s told me? Honest financial advisers who don’t believe such double-dipping in the trailing commission honey pot is kosher. You can bet the banks and wealth management companies are just happy to take the business.