Mortgage brokers smashed the bank “dictatorship” on home loans in the 1990s to give Australians cheaper finance and the industry continues to serve the nation well, the Finance Brokers Association of Australia says.
“Take mortgage brokers out of the market place and you set the clock back 30 years, allow the banks to become dictators again and let margins double, if not triple,” FBAA executive director Peter White said.
“There was no such things as offset accounts, lines of credit, redraw facilities on home loans. These were all innovations that were borne out of the competitive nature that brokers brought into the market.”
Mr White mounted a spirited defence of mortgage broking after the Productivity Commission criticised the industry for failing to promote price competition and therefore improve outcomes for consumers.
Cost-of-living data released by the Australian Bureau of Statistics on Wednesday showed the biggest quarterly increase in the cost of interest on a mortgage since the end of 2011, despite official interest rates being on hold for 16 months.
Mr White said the PC’s proposal to impose on mortgage brokers a legal duty to act in the best interests of clients, such as exists for financial advisers, was unnecessary.
Mortgage brokers would also resist any attempt to ban so-called trailing commissions, Mr White said.
The PC is inquiring into competition in financial services and a draft report on Wednesday questioned the role of mortgage brokers.
“The growth in mortgage brokers and other advisers does not appear to have increased price competition,” the report said.
“The revolution is now part of the establishment. Non-transparent fees and trailing commissions, and clear conflicts of interest created by ownership are inherent. Lender-owned aggregators and brokers working under them should have a clear best interest duty to their clients.”
The ‘revolution’ reference relates to the emergence of mortgage broking for home loans in the 1990s. Aussie Home Loans was the biggest agent for change, although it is now 100 per cent owned by the Commonwealth Bank of Australia.
“Banks were shutting branches all around Australia,” Mr White said.
“It was the brokers who said, I’ll come to your home and we’ll do it at 7 o’clock at night. It was a service that borrowers wanted and that’s the unique value proposition that still strongly exists today. That’s why around 54 per cent of people use a broker.”
Mr White also defended trailing commissions – fees paid to a broker for monitoring the ongoing suitability of a product.
“It would be a really bad thing [to ban such commissions]. In America they don’t have trail and what happens is the books are constantly churned.”
The PC is consulting about whether a fee-for-service model would be better for consumers. Mr White said it would not, because lenders should pay, not borrowers.
“If it’s fee for service the bank makes more money out of it, they get [brokers] doing all the work still and somebody else pays,” he said.
“That’s a bad consumer outcome.”
The FBAA is a member of a combined industry forum, which is already responding to concerns about stock broker remuneration raised by the Australian Securities and Investments Commission.