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Had it not been for COVID-19, a number of royal commission-led changes to the banking and finance industry would already have been in place – with more to come in December. Here’s what that means for brokers and for you.
In May, Treasurer Josh Frydenberg made an important announcement to the country as we began to seriously batten down the hatches in the face of the growing COVID-19 pandemic. The government was deferring its implementation of recommendations from the royal commission findings.
“This announcement today balances the need to implement the recommendations of the royal commission with the need to ensure our financial institutions are in a position to devote their resources to responding to the significant challenges posed by coronavirus,” he said.
Picking up the trail
There was one big change recommended by the royal commission that the government put on hold before COVID-19 was on the radar – with Josh Frydenberg announcing in March 2019 that it would now be set aside and re-evaluated in 2022.
It was a change set to impact those with loans – and those keen to apply for one in the future. The change was in the way brokers are paid. See, when you apply for a loan using the services of a broker, you’ve traditionally not needed to pay them an up-front fee.
They’ve been paid by the bank or lender you choose – often at the recommendation of your broker – both when you sign the loan and ongoing through the time you’re paying the loan off. Your lender makes money from the interest you pay over the life of a loan, and the broker earns a percentage of that interest in what’s called “trailing commission”.
But one of the major recommendations made by the royal commission was that it needed to change. So instead of being paid by the lender, the broker would now be paid a fee by you, the borrower, for their services. The royal commission said that this was because brokers were recommending lenders based on who’d pay them the biggest slice of the pie – both upfront and in ‘trail’.
But – through the Mortgage & Finance Association of Australia’s “Don’t Kill Competition” campaign – brokers had their voices heard, making it loud and clear that their work in fact was about helping drive loan costs lower for customers, not about their own best interests.
“This ongoing service exists the entire time you’re paying off a loan, and comes in the form of help and advice about things like refinancing and managing payments. Many brokers say that since COVID-19 has hit, they’ve been spending their time primarily working with existing clients, and their businesses might not have survived without trailing commissions.”
And they continue to argue that being paid trailing commission instead of an upfront fee is one of the biggest incentives for them to find the perfect loan for a customer – not one that benefits their hip pocket – and give ongoing advice and additional services at no cost to the borrower.
This ongoing service exists the entire time you’re paying off a loan, and comes in the form of help and advice about things like refinancing and managing payments. Many brokers say that since COVID-19 has hit, they’ve been spending their time primarily working with existing clients, and their businesses might not have survived without trailing commissions.
In whose best interest?
Many brokers consider the recommendations they make regarding lenders and loans in the first place, and the work they do after a loan is signed, to be work done in your “best interest” as a borrower.
But another recommendation of the royal commission was that brokers now have to apply “best interest duty” to every loan that they recommend. It’s another way the royal commission believed that brokers need to show they’re acting on your behalf as a lender instead of suggesting you take the loan that will make them the most money.
If you ask most brokers, they’d say the thought of doing so has never entered their minds – because ultimately they’re customer service professionals as much as they are financial experts – and your recommendation of them to family and friends who need a loan is worth more than any money they could spend on advertising.
What “best interest duty” looks like in a practical sense is a whole lot more proof of compliance regarding every loan recommendation – Broker X needs to have in writing not just why loan Y from lender Z is exactly right for you, but also why loans A, B, C and D from lenders E and F are NOT the right choice for you, either.
It sounds simple, but it means a heap more paperwork for brokers – so much so that many have already hired additional staff to cover the additional compliance work required. Now, the introduction of more complex compliance regarding best interest duty has been pushed back until the end of 2020.
Delaying the inevitable
While some in the mortgage broking industry were hoping that the delay may turn into a rethink of the new rules and regulations, the changes – which impact the wider financial services industry, including banks, in a range of ways – are still due to start arriving in December.
If you’ve got a loan that has been arranged using the services of a professional mortgage broker, give them a call to see what will change, and what they can do to help.
If you’re considering taking out a loan – now or sometime down the track – ask your friends and family for a recommendation, and call a broker you trust to see how they’ll be acting in your best interests now and in the future.