Last week the government introduced a draft bill into parliament containing a new “best interests” obligation on mortgage brokers. It follows from the final report of the banking royal commission where the recommendation was made by commissioner Kenneth Hayne.
Previously, the obligation on mortgage brokers was to recommend loans to clients that were deemed “not unsuitable”. So the proposed change is clearly a more onerous one, and the idea is that consumers stand to benefit.
My personal view is that mortgage brokers should already be putting their clients’ interests ahead of their own (more on this below). But if brokers are serious about dominating the market (they already have c 60% market share, and this is rising), then the industry needs to embrace changes which add legitimacy to the industry, and which protect consumers.
However, the definition of “best interests” needs to be considered carefully, and whatever the new obligations – these need to be administered so as to not drive away good brokers from the industry.
If the compliance requirements were to become too onerous, and/ or if practitioners in the industry can earn better/ easier money elsewhere, then many will do just that – leave the industry and pursue other career opportunities. This would be unfortunate, and only disadvantage consumers.
It’s not just the right thing to do, it’s the best thing for business.
In my mind, acting in the best interests of clients is not only the right thing to do (morally/ ethically), I am also of the firm belief that it is the best thing to do ‘for business’, too.
The surest way to gain trust from clients is when they see you putting their interests above those of your own. The short term payoff is always lower, however long term payoff is always higher.
Here’s an example…
12 months ago we got referred a client from a buyers advocate who wanted to buy an investment property. After our initial meeting, rather than refinancing their lending and setting up a pre-approval (which would have earned Long Property over $15,000 in commissions), my recommendation was that the clients were better off doing nothing, and simply maintaining their current position at the time.
The commission income to Long Property was $0, however it meant the client could retain access to more funds, which was going to help them better implement their desired strategy.
Two things happened afterwards. Firstly, the clients were very thankful for my honesty, and so naturally they passed on extremely positive feedback to the buyers advocate (the referrer).
As a result of this, the buyers advocate has since passionately referred many more clients, and the income we have generated from those referrals far outweighs the $15,000 we could have made from the original client initially.
Secondly, the same original clients just reached back out to me two weeks ago. Their objectives have now changed, they need our help on something else now, and the fees we will eventually earn from this business will be more than that initial $15,000 as well.
Cheapest is very rarely ‘best’
I’d also encourage the law makers to look well beyond just price and comparisons when it comes to the definition of “best interests”…
Saying that a broker didn’t act in the best interests of a consumer merely because they recommended a more expensive product may not in fact be correct.
Long Property is a very active and well respected brokerage now, but with all the loans we’ve written, I’m sure that there was a cheaper option available ‘somewhere’.
The question is… what is the quantum of these potential savings, how long will they last for, and how meaningful are they really to the client, bearing in mind all their other objectives, too?
All clients are rate conscious to some extent, but in the majority of cases, even for clients who are particularly rate conscious, my experience is that they tend to be more than satisfied knowing they have a highly competitive rate (say within the cheapest 10-20% of the suitable product set, even if it’s not the actual cheapest).
If the difference between the cheapest 10-20% of products is very minor, and most clients choose variable (as opposed to fixed) rates, and variable rates invariably change post-settlement anyway, then whatever the cheapest option is today, may not still be the cheapest option in a few months time. We see this all the time.
Also even if the savings did hold over a number of years (and that’s a big ‘if’), few clients are particularly interested in a few hundred dollars, if it means their loan process takes weeks or months longer, there’s a higher likelihood of things going wrong, and the banking platform they’re left with is a terrible one.
Beyond just price, what else is important?
In my experience, I’ve found borrowers gravitate much more towards the following service propositions:
- Getting a great/ ‘competitive’ deal (as explained above, as opposed to whatever is currently the ‘cheapest’).
- Getting their loan strategies and structures right (to optimise their position, to have the correct loan products, and to avoid mistakes).
- Finding a bank who can support not just want they want to do immediately, but also what they intend doing in the future (e.g. with respect to their longer term property/ wealth objectives).
- Developing a broker relationship with someone who keeps to their word, and with whom they can trust.
- A professional and reliable process – e.g. with everything well researched upfront, and then with everything thoroughly explained/ documented at each and every stage (NO CHANGES/ NO SURPRISES).
- An efficient process – with an experienced and genuinely service driven team (driving the process, keeping the clients regularly updated, and being available/ responsive at all times).
- A longer term relationship, so the clients have a ‘go to’ person they can always rely on, and so they can get further lending advice/ assistance when they need it in the future.
So what is the answer?
The challenge is going to be compliance, monitoring and oversight. How will brokerage businesses be protected if clients value the above items, but then there’s a loan product somewhere which presents (on paper) as being cheaper?
Perhaps as brokers we could have the clients sign our Preliminary Assessment document (or something of that nature) prior to any loan submission. This provides a neat summary of exactly what financial information is being used in the application, and also a short comparison of how the selected product compares to other similar ones.
This could also be an opportunity for the broker to reconfirm the clients’ objectives, and outline how the recommended approach meets those.
If this could be done in an efficient manner, then it would add a layer of protection for consumers (protecting them against unsuitable products, or potentially unaffordable loans), and it would enable brokers to more formally show their value.
The best interests duty can’t really be imposed on the ‘direct to bank’ channel, because there’s an inherent conflict there – banks can’t claim to be acting in the best interests of all consumers, if they only have one set of products, policies and pricing to offer. Who is to say a competing lender with a different offering wouldn’t be superior?
Over 60% of all residential loans are being originated from brokers now, and this market share is continuing to rise. So whatever the new legislation, the balance is that the industry needs to attract and retain great talent, because there’s a lot of demand for it.
If we over-regulate the industry, and/ or if conditions become too difficult for brokers to operate, then good operators will go elsewhere, and clients will be disadvantaged.
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