“Unintended consequences”. It’s the clichè consumer groups like CHOICE are used to hearing from industry groups every time a major review recommends a change that would put people before profits.
And we’re not the only ones who are sick of this clichè.
In handing down his final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Justice Kenneth Hayne warned that industries would cry “unintended consequences” as soon as they saw his blueprint for reform.
Hayne knew this would happen because it’s happened before. Every previous attempt at reform in financial services has been undermined in this way.
Governments often start out with good intentions but the industry fear campaigns, backed by slick lobbying behind closed doors, leave us with laws that are too weak to make a real difference.
And when it came to mortgage broking, Hayne’s predictions were right.
Lobbyists out in force
Within hours of the final report being released, the mortgage broking lobbyists were out in force claiming that interest rates would skyrocket, that any change to their sector would kill competition and deliver a win to the big banks. And as predicted, they took no time to lean on the vague but ominous claim of “unintended consequences”.
These claims are nothing but a carefully orchestrated campaign to kill off reforms that would harm the interests of large broking businesses.
Back in the ’90s, mortgage broking was welcomed as a way to break up the power of the big banks. For a time, that’s what happened, but as the industry has grown in the decades since, it has quickly become a race to the bottom – the brokers who pump out the most loans and encourage people to borrow as much as possible walk away with the spoils through upfront and trail commissions that foster unethical behaviour and bad outcomes for people.
We’ve known for a long time that commissions cause problems. They create conflicts of interest that are impossible to eliminate. That’s why we’ve banned them in financial advice and restricted them in life insurance. That’s why Hayne recommended that they should ultimately be completely eliminated from the financial system.
The best deal for brokers, not for you
Mortgage brokers have thrived under the promise of helping Australians get the best deal – but thanks to recent analysis from ASIC, we know that’s not the case. ASIC found that Australians receive no better interest rate from a broker than they do by going direct to a bank.
What’s the point of a mortgage broker if you don’t actually get a better deal? Through trailing commissions you’re effectively paying thousands of dollars for the entire life of your loan because someone helped you fill out the paperwork. And the Productivity Commission has comprehensively put to bed any idea that the costs of commissions aren’t passed on to consumers in the form of higher interest rates.
Trailing commissions encourage brokers to sign you up to bigger loans (because they earn more that way) and encourage them to keep you on the deal that’s best for them, not for you. Most mortgage brokers work with a small number of lenders and drive business to those that offer them the best commissions. In many cases, they’re owned or part-owned by big banks.
Canberra has capitulated
In the face of all this history and clear evidence of a market riddled with conflicts, Canberra has capitulated to lobbyists once again.
For a while, the government looked like it would act on the royal commission’s recommendation to end trailing commissions, but this week the Treasurer Josh Frydenberg backflipped under pressure from industry lobbying.
Somewhat arrogantly, the industry has this week trumpeted its success, sharing the anatomy of their campaign with the Financial Review and proudly declaring how wealthy, powerful men like Mark Bouris used their personal connections to scuttle reform. They call their work “grassroots” campaigning, but it needs to be called out for what it is – powerful, wealthy people protecting their own interests, against the best interests of the community. There was nothing grassroots about this.
This isn’t how democracy is meant to work. Last month I wrote that this issue was “shaping up as parliament’s greatest test”. Parliament has already failed that test. By letting lobbyists win, our politicians send the message to bad industries that parliament can be bullied out of doing the right thing.
The lobbyists and industry groups are in this for one thing: self interest. And if we’re to learn anything from the royal commission, we need our politicians to get better at seeing that for what it is.
This article originally appeared in The Guardian and was then cross-published on CHOICE’s website on 15 March 2019 – https://www.choice.com.au/money/property/buying/articles/government-gives-in-to-mortgage-broker-lobbyists
Alan Kirkland is the CEO of CHOICE.