Australians have heard worrying stories from the Royal Commission(RC) into the finance and banking industry, shedding light on issues which have largely remained out of sight. As it continues, it is timely to talk with two of Vision’s principals, Dave Lennox and Hamish Ferguson about the future for the industry in the wake of these issues.
They have decades of experience as business owners in the mortgage broking industry and have witnessed it reaching similar crossroads before. Each time they have seen the industry recover strongly and more resilient after much-needed reflection and examination.
Why did we need to have a Royal Commission into the industry?
Finance is an important lifeblood of the economy. It impacts everyone from the young saver with their first money box through to big corporations. It touches all of us.
The banks have become huge businesses and are more influential today than they were 20 years ago. The Big 4 have a combined market capitalisation of nearly $400 billion and make nearly $45 billion in combined profit before tax.
With huge numbers like this, sometimes the community needs the banks to have the torch shone on them to ensure they meet consumer standards. People want to know that banks can be kept in check from abusing their market power.
One question coming from the commission is: is it OK for banks’ representatives to be called advisors when most people would expect that this type of professional should not be aligned to a particular institution or product? Can they really advise?
This is not to be overly critical of the banks as they have an important role to play in the financial services industry and economy. However, all financial services businesses need to focus first on finding out what clients really need and trying to fulfill those needs. Clients must come first!
What has been your take on the Royal Commission so far?
When people outside the industry are making decisions without sufficient industry representation there is a risk of harming the industry more than protecting the consumer. There seems to be a lot of focus on brokers – maybe too much. The banks are getting a lot of attention as well, however, what needs to be realized is that not all lending institutions are banks.
Currently, mortgage brokers look after more clients with their property lending than all other financial institutions combined. This is one aspect of the MFAA’s submission to the inquiry. Mortgage brokers are playing a larger role than they ever have, and this is because it is what the consumer has wanted.
One thing I like is that the RC sheds light on misconduct. We all want the bad eggs to be exposed and filtered out. This benefits the consumer and us. We hope all industry participants can heed the message that it is so important to look after clients and to always do the right thing.
I’m not surprised with some of the attention that banks have been receiving. I’ve noticed that banking executives have been finding it tough answering some of the commission’s questions. It is uncovering several areas for improvement and we are getting a sense of where there have been some gaps.
What do you say to the claim that borrowers will pay more if they go through mortgage brokers?
I would say 3 things. Firstly, I don’t believe our clients pay more. Most would pay less through us, as we do our best to negotiate hard and win the best outcome for them. If we don’t do that, we will lose clients quickly.
Secondly, we are more likely to know which bank is targeting what ‘client type’ at any time. For example, which lenders will suit clients with smaller borrowing needs or which ones are good with self-employed clients or investors, etc. This knowledge works in our clients’ favour when we are arranging the best possible deal for them.
Thirdly, there is strong competition between brokers and branches. Consumers benefit from that. If brokers didn’t exist, branches would be less motivated to negotiate with their own borrowers. With mortgage brokers in the market, competition is better and everyone is better off.
Mortgage brokers help keep everyone honest. The extra competition we provide is healthy for the industry and consumers who need a quality loan product that suits their needs and purpose.
There are claims that brokers put borrowers into long-term interest only loans so they can earn more commission. What do you say to this proposition?
The problem with that claim is that it fails to evaluate the differences between the kinds of clients that might use a mortgage broker, compared to the sort of clients that may want to use another source for their mortgage.
Another thing to consider is the type of business the mortgage broker is involved in. This can often mean they will see clients that tend to want a particular kind of mortgage. For example, if a broker promotes their business as an advisor they will see more of a particular client; a client who is more likely going to be an investor and who will want a different kind of loan to a first home buyer.
Our clients want advice, often to find ways that financially they can get ahead. If investment strategies are top of our client’s desires and they need someone to help them finance this, then this will typically involve some component of interest only debt.
I would like to point out that with the changes to interest rates recommended by APRA, this trend from my position is starting to change. There needs to be a clear client need if we are going to recommend interest-only loans. Every client wants success. Mortgage brokers can’t win if they don’t advise their clients properly.
Interest-only products tend to be used by borrowers for strategic investment purposes. This is usually part of a plan for their financial future. There is also a disincentive to steer clients one way or the other. If we are not servicing clients’ needs, we will be unable to maintain long-standing relationships.
Professional brokers want to develop relationships with their clients for the long-term and have them coming back time-and-again. Mortgage Brokers survive by winning repeat and referral business. This relies on developing relationships that last for a long time.
Trailing commissions are coming under fire. Are brokers more or less likely to give good advice because they receive trailing commissions?
Trailing commissions are an important part of mortgage brokers’ remuneration structures. It allows mortgage brokers to take the position of being a long-term service provider for clients. There are so many things we do for clients outside the activity of setting up a new loan. We use the money we receive through trailing commissions to increase our services and continue to work on clients’ finance structures.
Do you think mortgage brokers are paid too much?
We want to give the right advice, and, there is a lot more work that goes into loans today than there has been in past times. On top of the upfront work, there are at least an additional 1 to 2 hours of work per year, per client, in managing clients’ needs and answering their questions.
Mortgage Brokers also tend to give after-hours service, which many other financial services businesses don’t offer. It is a regular occurrence to visit clients in their homes; sometimes long after many people have left work.
Mortgage brokers also compete in a very competitive market. They need excellent negotiation and communication skills. They are also helping steer clients during a very stressful period. It is not uncommon through good advice for us to save our clients thousands of dollars in preventing mistakes. When taking this into consideration, no, the remuneration brokers receive is not excessive.
I honestly don’t think mortgage brokers are paid too much. I think the current structures are well balanced. Like anything, if there was a substantial cut then professional broking firms like us would need to work out how to maintain our high level of service. I think our clients want that service, and as time passes they are naturally going to expect more. They’ll want even better service. There is always going to be pressure for business to give more rather than less. This is part of what I enjoy most as a business owner.
You need to have a substantial amount of infrastructure in place to be able to do the work that is required in a modern and professional mortgage broking business. Ultimately, this needs resourcing, and the funding we receive at the moment is adequate.
Are mortgage brokers still a good option for consumers?
Yes, absolutely. Mortgage brokers are a fantastic option for consumers!
Government and industry want brokers to give good advice and provide the best choices possible for consumers. Brokers look beyond asking ‘which one of our products is the best?’ and but offer advice and solutions that have a longer-term benefit. Most people want the kind of service that offers them a wider selection. This is the kind of service available via mortgage brokers today.
I use the example of going shopping for paint… if you want blue paint visit ANZ, if you want yellow paint visit CBA. But if you are not sure what colour is best, then come to a place that has every colour PLUS it has painters, architects, designers, builders, etc.
What I mean is that brokers need to be across the whole industry – products, rates, credit policy and project managing all parties (agents, lawyers, accountants, clients) towards a positive client outcome. We save time, provide better advice and we need our clients to be happy.
How do you see the future for mortgage brokers?
More regulation is bound to happen. The government wants to do all it can to protect consumers. This is a good thing! They want to prevent a small minority from acting badly. Most importantly, they want to restore confidence in the industry.
I think this is also a checkpoint. We have had them before, and I’m sure we’ll have them again. It’s a good time for everyone in the financial services industry to take stock and work out how they can be better at putting clients first.
Change is increasing, and people want things done more quicker and better today. They want to receive quality advice but also don’t want to spend too much of their precious time on something when they can confidently engage a professional to advise them on. This is why I think professional mortgage brokers will always have a future.