The final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released last night, after which federal Treasurer Josh Frydenberg announced the government’s intention to proceed with 76 recommendations made by Commissioner Kenneth Hayne.
As part of this, mortgage brokers are set to lose trailing commissions on loans and will transition to a consumer-pays business model.
Ken Morrison, Chief Executive of the Property Council, said “restoring trust, better consumer outcomes, maintaining the flow of credit and promoting competition” are key outcomes of this landmark final report – but warned that these shifts would have to be “carefully managed”.
One of the key recommendations to impact the finance and property industry was around mortgage broker commissions. Effective July 1st 2020, trail commissions will be banned on all new loans. Over a period of 2 to 3 years, then all other commissions will be phased out, with mortgage brokers shifting to a consumer-pays model whereby borrowers foot the bill.
“The abolition of trail commissions and the proposed shift in future to a ‘borrower pays’ model for broker commissions will need to be very carefully managed, so that the objective of better outcomes for consumers is achieved without making it harder for qualified borrowers to find and secure competitive finance for property purchases,” he said.
With mortgage brokers currently responsible for almost 60% of residential home loans in Australia, this move to was “exactly what [the banks] wanted”, said Brendan Dixon, founder and managing director of Pure Finance.
“Once implemented, the banning of mortgage broker commissions will inevitably strengthen the profits and position of the major banks and reduce lender competition substantially – exactly what they wanted,” he said.
“On top of this, how will low income earning Aussies afford a fee for a mortgage broker to get a cheaper deal? They won’t, but the rich will – if there’s any brokers left.”
Meanwhile, Professionals of Australia (PIPA) chairman Peter Koulizos said he hoped the report’s release would bring an end to the over-the top credit restrictions that had been in play for more than three years, which were starting to have a negative impact on the national economy.
“Solid borrowers, who should have no problem securing finance under normal credit conditions, are getting knocked back for silly reasons such as spending $50 on Uber Eats on a Friday night,” he said.
“With property prices continuing to fall in our two biggest capital cities, inflation stubbornly low, and wages flat-lining, lenders need to release their strangle-hold on credit so our economy can get moving again.”
This sentiment was echoed by Michael Yardney, founder of Metropole Property Strategists, who suggested that “the good news was that there was no recommendation for further tightening of the Bank’s lending criteria, which could have worsened the current property downturn”.
“In my mind, mortgage brokers provide an important service to borrowers, both home owners and property investors, helping them choose the most appropriate loan in the midst of a maze of options,” Yardney said.
“Currently the government has not adopted the report's proposal to ban commissions for upfront commissions for brokers… however, Labor has indicated it supports the Hayne reforms. It will be interesting to see how all this plays out, but it may mean mortgage brokers will have to start charging clients an upfront fee,” Yardney added.
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