Just how bad are the banks? – Siobhan Hayden

The Royal Commission into the banking sector is in full swing, and we’re learning lots about how the financial sector works.   So, just how bad are the banks, and what are we learning about the relationship between the banks and brokers?    Siobhan Hayden is the COO for HashChing and she joins us to give us her impression of what we are seeing.
Kevin:  The calls for a full banking inquiry have been relentless for years from a broad cross-section of the community. Prime Minster Malcolm Turnbull announced a Royal Commission into the banking sector late last year, after sustained pressure from within his own government and an admission by Australia’s Big Four banks that an inquiry is necessary to restore public faith in the financial system.
The inquiry is, of course, in full swing, and we’re learning lots about how the financial sector works. So, just how bad are the banks, and what are we learning about the relationship between the banks and brokers?
HashChing is a website that has been developed to help borrowers connect with brokers. Siobhan Hayden is the COO for HashChing and joins me.
Siobhan, thank you very much for your time.
Siobhan:  Thanks for having me, Kevin. Nice to chat.
Kevin:  Interesting to get your insight into what’s happening here. Half of Australia’s mortgages are written by brokers, who act as a third party between the customer and the lender, but who are they really working for?
The reason I ask that question is because Australia’s largest institution, the Commonwealth Bank, admitted that there was a conflict of interest created by commission payments that banks made to mortgage brokers. So, that’s the question: who are they really working for?
Siobhan:  Yes, a big question, so let’s start from the beginning. First off, the statistics now, it’s nearly 60% of all new residential lending in Australia is introduced by mortgage brokers, and that growth rate has increased at about 2.5% year on year. So, successively, more people are choosing to partner with a mortgage broker than walk into a branch.
The CBA’s commentary: there was quite a few pieces that CBA talked about and one part was that their brokers were not able to accurately identify the commissions they earned on the loans they introduced.
And that, straightaway, when I read that article, flagged to me that what they were talking about was CBA mobile lenders, not mortgage brokers that have access to multiple lender brands around the country. Because the documents required to be completed by mortgage brokers requires a broker to accurately document “On this loan, for this loan amount, you will be paid X and Y, upfront and trail.”
So, the conflict of interest, the main piece around that was around the commission payment, and particularly how commissions are paid based on the size of the loan introduced to the lender. And that has been talked about in the previous review into mortgage brokers through ASIC, which is our industry regulator.
So, what that means is if I provide a loan to a customer of $600,000, I earn commission on the $600,000. And what’s to say the client maybe needed $550,000 or $580,000? What’s interesting for me, Kevin, is the difference between $580,000 to $600,000, we’re talking such a little amount of money: $20, $40, $60 – it’s nothing.
The other part is the Combined Industry Forum, which came out of our original review for the last few years in the sector through ASIC, has already started to discuss solutions to that, which is around the brokers should be remunerated on what the loan is drawn down on at day of settlement.
Probably, an example of that would be customers who often talk to brokers talk about getting an additional lending amount for things like renovations to a kitchen or bathroom after they’ve settled into their new home. And often, if they’re able to, they will borrow just a little bit more – $50,000, $80,000 – more to do those renovations in a six-month period.
If those funds are sitting in an offset account, the industry groups have discussed the idea of not paying on the money that is sitting in an offset, purely what is used to purchase the home from day one – which sounds like a viable option.
One of the alternatives that’s been touted, particularly by lenders, is the notion of a fee-for-service model, which I find really interesting because at the end of the day, it would decimate the broker channel.
Brokers work only for the money they earn on commissions, which is when they settle alone. Now, every customer a broker deals with, those loans don’t all settle, they do lots of customer engagement, lots of analysis, and work unpaid, hours of unpaid work.
So, where would the fee-for-service model come in? And would customers be prepared to pay it? And at what stage would a customer be required to pay money?
Kevin:  Can I just ask you a question, though? There is some evidence that’s come out of the hearing, as I understand it – correct me if I’m wrong – is that customers going through brokers have a higher total loan-to-value ratio. They pay more interest and they pay their loans more slowly. Is that correct?
Siobhan:  Well, those commentary pieces are not untrue in many ways, but I think you need to be clear about the type of customer who chooses to partner with a mortgage broker. So, in my pervious role, I was working at the industry body for mortgage brokers in Australia, and a piece of the work we did was the type of customers who choose to work with a mortgage broker: 40.5% of customers are investor clients.
So, these are fiscally alert, often second-property owners, and normally for taxation purposes it’s not uncommon to see investors choose to have an interest-only feature. And if you have an interest-only feature on your loan, you may obviously be paying that loan down a little bit slower than you would if you’re doing principal and interest. You tend to also have a higher loan-to-value ratio, and you would also tend to have a higher loan amount.
So, suggesting comments like that without contextualizing why… So, 14% of mortgage brokers’ business is first-home owners. And it kind of makes sense, Kevin. if you’re a first-time buyer, you don’t fully understand the notion of a mortgage broker. You may walk into a local branch and deal directly with a single-lender brand.
Whereas people who are fiscally alert, aware of what mortgage brokers do and the service proposition they provide, that tends to be people who’ve maybe been around the tracks once or twice, bought, sold, re-financed, and don’t wish to walk into a branch. They want to deal with a broker that has access to 25-plus lenders, and will do all the servicing for them and assist them through that process.
Kevin:  What’s happening at the inquiry? One, are you in support of that? And is there a light at the end of the tunnel here?
Siobhan:  Well, I go back to the previous two years that the industry body has been reviewed. And let me just go through some data here. In 2015, ASIC, the regulator, gathered over four years’ worth of data. 1.4 million home loans were analyzed. They surveyed 3000 consumers to learn about their experiences with brokers and analyzed $550 billion in new loans. So, this was all done in a two-year window, in collaboration with the industry, to identify what is actually being achieved and are brokers delivering good consumer outcomes?
Once that finished at the end of last year, obviously we had the Royal Commission announced, and I think it’s important to understand, again, the context. We have the major banks being held responsible for what has deemed to be a poor culture within banking and as a result of their culture, delivering bad outcomes. I think CBA was also on record of saying “We’d like to tweak the commission provided to brokers but we don’t feel we’re capable of doing that because we’ll lose business.”
So, I think there’s a number of issues going on here. It’s in the interest of the major banks, is it not, to maybe suggest that brokers are doing the wrong thing, because that would provide more additional flow to their bricks-and-mortar locations. But all the second-tier lenders, all the banks that don’t have a retail outlet, would be completely cut off from consumers if they don’t have a direct digital model, if brokers didn’t exist.
So, the competition piece, which is really important for consumers and definitely brings about better pricing on home loan products, is to have that broker proposition available. And the industry is not averse at all to working collaboratively, particularly with ASIC, who has done a lot of robust analysis on the industry, to refine what we currently do and make it even more transparent for consumers and everyone’s a supporter of that approach.
Kevin:  Yes, certainly. The mere fact that half of all Australian mortgages, as I said at the outset, are written by brokers, there’s certainly a great demand for that.
Do you see that popularity growing? Is there an indication that it’s actually getting greater?
Siobhan:  Well, every year it grows conservatively and deepens the usage of mortgage brokers around Australia. So, I think that it will only continue to do that. And we don’t even capture accurately the flow of deals through the commercial lending channel. So, this is only residential lending.
In the UK – obviously, we look to the UK for a lot of learnings and experiences – their flow over there is 67% through mortgage brokers. What’s also been interesting, if you look at the UK model, is the lending environment there has been asked to divest their ownership of mortgage broking businesses.
So, potentially, if CBA believes it’s such a conflict of interest and other grounds, potentially that could be an option for them.
Kevin:  Wonderful stuff and very good insight there, Siobhan. Siobhan Hayden is the COO for HashChing.
Siobhan, thank you very much for your time.
Siobhan:  No problem, Kevin. Nice to chat.

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