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The idea of a post-commission world where mortgage customers are better off is too idealistic, according to an economist.
Dr Andrew Wilson, chief economist at My Housing Market, is the latest to warn of the adverse consequences of banning lender-paid broker commissions, as recommended by Commissioner Kenneth Hayne in his final report, saying that it would stifle competition in the mortgage market and drive customers into banks with sizeable branch networks.
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He said the lack of bank competition has, to some degree, been offset by the “highly competitive sub-industry of mortgage broking”, which has provided consumers with “much-needed value leverage against banks”.
As such, overhauling the lender-paid remuneration structure – one that has “clearly been working well” – to the point where brokers are forced out of business would be counterintuitive if the aim of the recommendation is to protect consumers who are seeking to make one of the most significant purchases of their lives.
“It’s almost like [being in] cloud cuckoo land... to expect these sorts of outcomes,” Dr Wilson said.
The chief economist also expressed confusion as to the disproportionate amount of attention being paid on the “market power constriction” of mortgage brokers, rather than the banks.
“[Mortgage brokers] have strong market power as a group, but they largely operate as individuals [or small businesses], not for significant entities. Whereas the banks have very strong corporate foundations in terms of shareholders,” Dr Wilson noted.
Describing the royal commission’s recommendations as “perplexing” with brokers treated as the “convenient scapegoats”, the chief economist said it remains unclear as to why mortgage brokers are being blamed for the negative outcomes that have resulted from “poor corporate governance and management culture in the banks”.
In fact, according to Dr Wilson, reduced competition in the mortgage market would likely “exacerbate” this.
“When you have organisations that make significant profits [and] have significant market power – and that’s because there’s a lack of competition – it also means that the management structure doesn’t have competition either,” he said.
“I’m not sure that you [can] blame the one competitive part of financial services, which is mortgage broking, for the negative outcomes that were revealed [by the royal commission]… Poor management practices will only be exacerbated if you reduce competition.”
The My Housing Market chief economist further noted that the type of financial products that mortgage brokers are dealing with are ultimately governed by the “rigid lending rules” that the banks operate under, and so, commission-based broker remuneration does not necessarily affect the risk environment for lending.
“If we did have some issues around mortgage defaults rising as a result of the nature of the mortgage broking industry, I think [the recommendations] would be legitimate. But we don’t have that,” he added.
Dr Wilson said it remains unclear whether there will be any drastic changes to the mortgage broking industry due to the “growing sense that we need to be very careful about any legislation that is introduced”.
“This is very important to not just the consumers’ asset growth, but also the economy going forward,” he continued.
“It would be quite concerning that we had legislated outcomes that weren’t based on a coherent set of logical insights into this whole process.”
Prime Minister Scott Morrison himself was hesitant towards the royal commission’s recommendation to eliminate lender-paid broker commissions, saying that he doesn’t want the broking sector to “wither on the vine and be strangled by regulation that would throw them out of business… [and] deny choice and competition in the banking system”.
“If there is one thing that we have learned through this process, it is that we need more competition. We need more options. We need more choices. Not fewer. And that is what the Treasurer and I are concerned about in terms of how we would go forward on that one recommendation [on broker remuneration],” the Prime Minister said last week.
Dr Wilson suggested that the government consider introducing rules that require banks to demonstrate their actions are for the benefit of the public.
A common viewpoint is that financial stakeholders are the main reason why the big banks’ lending practices are deemed to be unethical, and that the first step to addressing the challenge is developing management practices that eliminate trade-offs between “doing well” and “doing good” while satisfying both financial and non-financial stakeholders.
“I think politicians should rationalise what the public good is in terms of the management of banks. In other words, it’s a quid pro quo that they have market power, but the offset to that is that they must be able to show that they’re operating in the public good,” the My Housing Market chief economist said.
“I don’t think that’s got anything to do with mortgage brokers who operate in the public good. They operate in a highly competitive environment, so if they’re not operating to the satisfaction of consumers, they go out of business.
“I think that’s where we need to start talking about making rules for banks that they should be able to prove that they’re operating in the public good, not just for their shareholders’ good.”
[Related: Still time to bring ‘common sense’ to trail debate]
