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The governor of the RBA has cautiously told senators that, “in principle”, Australia could move to a borrower-pays model where mortgage broker fees are “capitalised into the home loan” and paid off over time.
Appearing before the Senate economics legislation committee on Friday (22 February), Reserve Bank of Australia (RBA) governor Dr Phillip Lowe was questioned on the central bank’s stance on Commissioner Kenneth Hayne’s recommendations on the mortgage broking industry, particularly whether changes to how they operate and generate revenue would boost or curb competition in the mortgage market.
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Without directly answering the question, the governor admitted that he is “broadly” in favour of the royal commission’s final recommendations, adding that the termination of trailing commission, as well as the introduction of a best interests duty for mortgage brokers (similar to the one imposed on financial advisers), “makes a lot of sense” to him.
He acknowledged the role brokers play in strengthening competition in, and helping borrowers navigate the complexities of, the mortgage market, and said he would not want any changes to “undermine” the industry.
“Many of the smaller lenders in the country rely very heavily on brokers, some of them, 80 or 90 per cent of their loans are generated through the brokers. So, if the broker channel weren’t to work effectively, then the smaller lenders would have trouble and there would be less competition in the market,” the RBA governor told senators on Friday.
“They also help each of us work through the maze of these thousands of products. That’s their job… to understand the thousands [of products out there] and work out which is the best deal. So, mortgage brokers play a very important role in facilitating competition.”
While Dr Lowe was undecided as to which party should be responsible for paying for services of a mortgage broker, he said that, “in principle”, a fee-for-service model – where the borrower is responsible for paying a mortgage arrangement fee – could work.
“I think in principle we could move to a model where the borrower pays and the fee gets capitalised and you pay it off over time. But I would be wary of doing that too quickly, and we need to look at it very carefully before we do that,” the RBA governor said.
“So as we transition into this new model, it’s worth taking the time to make sure we get this right because I wouldn’t like to see the brokers undermined and not be able to provide that service so to enable competition in the market.”
When asked whether the Netherland’s removal of lender-paid broker commissions and subsequent implementation of a borrower-pays model had led to a decline in the nation’s broker population, Dr Lowe noted that he had previously spoken to the governor of De Nederlandsche Bank who said the changes resulted in “some teething problems” but the “market has adjusted”.
“The Netherlands’ mortgage market [is] more complicated because often the mortgage is somehow tied up with your funds, your pension, so it’s all much more complicated than our market,” the RBA governor added.
The idea of introducing a borrower-pays model, as recommended by the banking royal commission was widely criticised by the mortgage industry for being counterintuitive to both competition and improved customer outcomes. Arguments against the model included that consumers might not be able to afford the fees attached to mortgage advice, resulting in the reduced ability to access the right loan products (including products from the smaller lenders), and those who are able to afford the fees could be “forced to absorb significant costs that the banking sector [was] previously responsible for”.
Darren Cantor, managing director at Mortgage Advice Bureau (Australia), told The Adviser recently that he cannot imagine how the fee-for-service model could be implemented in a consistent and “equitable” way across the mortgage industry.
He noted that big banks with sizeable branch networks have the advantage of scale and would be able to push fees down to the point they “undercut the broker market”, and further, that smaller banks and non-bank lenders that do not have a big shopfront presence and are reliant on brokers would unlikely be able to charge similar fees to bigger banks or even have sufficient access to customers who could simply walk into their local bank branch when seeking a mortgage.
While the major political parties were firm in their initial statements that they would be implementing Commissioner Hayne’s 76 recommendations, they have since backpedalled.
Following widespread campaigning and lobbying by the broking industry, the Liberal Party, including Prime Minister Scott Morrison, showed some hesitation towards the abolition of lender-paid commissions, while the Labor Party proposed that lenders instead pay brokers a standardised upfront commission as a proportion of the loan amount. It suggested that commissions be capped at a fixed rate of 1.1 per cent.
[Related: ALP announces broker remuneration policy]
