Expect tighter lending standards

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Consumers can expect to see banks implement tighter lending standards as the government clamps down on misconduct in the financial industry, according to research firm IBISWorld.

The first round of hearings in the Royal Commission’s probe revealed practices where banks could potentially grant loans to risky borrowers. For example, a high-ranking official at ANZ admitted in March that the bank does not verify general expenses of broker-originated customer loans.

General manager of home loans and retail lending William Ranken said that there was no incentive for ANZ brokers to scrutinize customers about expenses – because they know the bank will default to either the declared expenses or the household expenditure measure (HEM), whichever is higher.

 “They have their own obligations under their own licensing requirements to ensure the product’s not suitable for the customer and understand their customer’s position,” Ranken said. However, he added the bank requires that living expenses be included in brokers’ “initial conversation” with customers.

The probe also highlighted misaligned interests between customers and brokers in the remuneration structure for mortgage products.  Ongoing and up-front commissions for brokers were maximised when customers took on larger mortgages and repaid them over a longer period of time.

“Commissions for mortgage broking could replicate the approach in life insurance remuneration, where regulators have reduced and capped ongoing and up-front commissions. This will be the case if financial institutions remain vertically integrated, as highlighted by Westpac revising its remuneration model,” IBISWorld senior industry analyst Tommy Wu said.

According to Wu, the tighter lending standards will likely provide some opportunities for other banks and non-bank lenders. Banks will need to assess the impact of higher regulatory costs on bottom lines, and balance compliance costs with returns to shareholders.

The research firm also expects banks to become smaller, moving away from other services and going back to basics in terms of their core business of lending. “This move away from providing advice and scaling back operations will help reduce risk for the major banks, minimising the potential for further significant regulatory trouble,” Wu said.


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