About a decade ago, shonky operators in the new growth industry of mortgage broking led to widespread calls for more regulation. And so gradually, and rather reluctantly, the government worked itself into something-must-be-done mode.
Having been wary, the industry itself favoured national regulation as in WA, then Victoria and NSW. But predictably enough, the regulation became the joint creature of the industry and the government.
As I warned as the impending farce was being ramped up, government regulation of brokers helps them pass themselves off as disinterested fiduciaries, when they’re salespeople.
Of course, regulation adds costs. But the main problem is that the proposed regulation deepens the ambiguity between the duties of a salesperson and a fiduciary adviser. Sales agents are to become “licensed brokers”. If it looks, waddles and quacks like a duck, we’ll make a mess trying to turn it into a swan. (I’m with Michael Leunig on this: there’s a lot to like about the humble duck.)
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Look at the ducks that once were insurance salespeople now morphed into the swans of financial planning: they’ve been progressively engulfed in an endless web of requirements to improve their advice. The slabs of text comprising their constant customer assessments are generically drafted by sales executives, vetted by lawyers and spewed forth from software that “wows” the customers in their living rooms but is promoted as “sales technology” within the industry. Do customers read these reviews? Do they find them helpful? Who knows? Not the regulator who, having regulated, moves on.
Meanwhile, an average retiree will be about $65,000 poorer for the fees they pay to financial planners to help them choose a super fund rather than invest in “industry super” …
NSW regulation already requires finance broking contracts (FBCs) in which the broker outlines the service he’ll provide bizarrely enough before he provides it! Now let’s say you prefer no fees — who doesn’t? If we write that into your FBC, then we can’t suggest you consider a product with fees, because it violates the contract. If we write this possibility of fees into the FBC, you will wonder if we’re fitting you up with fees you don’t want …
This Kafkaesque charade is the perfect beginning to a nightmare of documents. The broker explains one by one until that sweet moment when, through a long sigh, the customer offers up his wearied and complete capitulation. Just sign here. And here. And here. I could go on.
Sure enough with national regulation, brokers are expanding their share of the market. And, with their foot in the door, so the lenders must pay them those commissions, which buy their recommendations. The broking industry magazine The Adviser recently offered these comments:
Brokers should see their market share eclipse 50% over the coming few years, thanks to NCCP [the National Consumer Credit Protection Act 2009].
Speaking to The Adviser, Advantedge’s [sic] general manager of broker platforms, Steve Weston, said the new legislation had helped improve the way brokers were viewed by borrowers … Weston said legislation had helped brokers promote themselves as true finance professionals, which should help them grow their distribution.
“Bank branches will always struggle to compete against brokers, especially in today’s legislative environment,” Weston said. “Brokers have a choice of loans, they have expertise and they now have a very strong service proposition that includes the giving of financial advice.”
“It is for these reasons that I expect brokers to see their market share grow in the next few years, and there is nothing to stop it growing beyond 50%.”
Brokers generally provide good service, which is no more self-interested than bank branches. And our ability to offer a range of loans may well lead to better customer choices and almost undoubtedly leads to more competition between banks. But it also inflates the cost of borrowing, which must bear the cost of commissions.
Brokers commissions crashed during the financial crisis as banks exploited the collapse of their main competition — securitised lending. But commissions seem to be recovering strongly. Bankwest raised commissions in March and NAB recently restored some of its commissions to pre-crisis levels.
NAB already has a competitive offering, but this will have brokers such as myself plucking the lender first when giving my clients a product comparison. Now you’ve struck a chord and are on the right path to winning broker support.
All this from a government certified “finance professional”.
*Nicholas Gruen founded and still owns Peach Discount Mortgage Broking, which rebates commission to borrowers