FUTURE OF MORTGAGE LENDING IN AUSTRALIA
CANBERRA, 19 MARCH 2019
Thanks very much, Mark, and can I acknowledge we're meeting on the traditional lands of the Ngunnawal people and pay my respect their elders past and present. I thank Australian Finance Group, Connective and Mortgage Choice for putting on today's event.
I acknowledge my fellow panellists – Mark Hewitt, Mark Nocera and Mark Haron.
When it comes to the question session, please do feel free to call me Mark.
That will ensure that the panel gets full marks.
Did I mention that I’m a dad?
For those of you who are visiting Canberra, welcome. The OECD determined this to be the most liveable region in the advanced world, so I hope you'll take a chance to enjoy the beautiful bush capital.
I'm sorry that we're not joined by a representative of the Coalition today. However, I can assure you that after nine years in politics and hundreds of Question Times, I can probably answer questions on their behalf too.
As Mark Hewitt mentioned, I’m trained as an economist. So when I first think about mortgage broking, it is through the lens of economics. In simplistic neoclassical economics, there is no role for brokers. Customers are rational and they’re perfectly informed. They have all the information that's out there. Naturally, such models would also suggest that we’re all millionaires with six pack abs.
Behavioural economics has shown that the world doesn’t work like that. The fact that we don't gather all of the information and we don't necessarily think rationally through decisions is what creates the opportunities for brokers to emerge whenever people need to make complicated decisions. We see this in the area of healthcare. We see it in the area of purchasing insurance. Any time there is a matching problem, you'll find a broker.
Your industry has a long history. As best I can tell, one of the first mortgage brokers was Sonnenblick-Goldman, founded in New York in 1893 to arrange debt financing for hard-to-finance real estate projects. It emerged out of the standard frustration that many borrowers feel, that the only time the bank will approve your loan is when you can prove to the banker that you don't need a loan. Mortgage broking in Australia first kicks off in the 1960s. 1980 saw the creation of the Mortgage Finance Association of Australia. But even in the early 1990s, your industry's share was only in its teens. It’s only really in the last generation that we've seen mortgage broking emerge to now account for a majority of loan financing.
As Mark noted, the Productivity Commission report has acknowledged the important role that mortgage broking plays in fostering competition. It helps customers shop around. It avoids people making the mistake of thinking that the only place to borrow is the place where they've saved. By breaking that link between savings and loans, we avoid the risk of automatically replicating market share in the savings market into mortgage market. Australia has a pretty concentrated banking sector. So ensuring that we get more competition is good for those smaller lenders, for the building societies and the co-operatives. It's also important for customers in getting the best deal.
But as the Royal Commission has highlighted, there's challenges for the sector. Just as you wouldn't expect me to defend all politicians (this week of all weeks), I'm sure none of you would want to defend every single mortgage broker in Australia. While the vast majority of mortgage brokers deliver their services with distinction and professionalism, the Royal Commission did highlight examples in which mortgage brokers weren't acting in the best interest of their clients.
Labor’s approach to the Royal Commission recommendation 1.3 was to follow an approach which in our view achieves the objectives set out in the Royal Commission, but does it in a way that doesn't harm competition in the mortgage market. We've done that through extensive consultation with your peak bodies. My colleagues Chris Bowen and Clare O'Neil are grateful for the constructive engagement that mortgage brokers have had with the Labor Party as we developed that alternative response.
The Royal Commission’s concerns centred on conflicted remuneration and incentives that drove higher than necessary loan sizes. Labor has announced that if elected, we would deal with these problems through a fixed percentage upfront commission for brokers, eliminating the conflict of interest that comes from different lenders offering different commissions, which could lead to customers ending up with a loan that's not in their best interests. Labor would also ban volume based commissions and soft dollar payments being offered to brokers by lenders.
What was reflected back in our consultation with your sector was that the fixed percentage upfront commission rate should be 110 basis points. We have announced that will abolish trail commissions from 1 July 2020. Abolishing trail commissions was a bipartisan recommendation until the Coalition backflip last week. In my view that is not in the long term interests of your sector. It has brought mortgage broking back on to the to the news cycle. It has taken away the policy stability for your sector that we had before the Coalition backflipped.
We will implement the Royal Commission via a taskforce within Treasury. We would require the Australian Banking Association, the four major banks, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission to develop Royal Commission implementation plans by 1 August 2019 and submit them to the Royal Commission implementation taskforce. We will require major companies, industry bodies, the Australian Prudential Regulation Authority and the Australian Securities and Investments to publicly report to the Royal Commission implementation taskforce every six months about their progress in implementing recommendations. We will require the four major bank CEOs and the Australian Banking Association to report to the House of Representatives Economics Committee on their progress in implementing the recommendations of the Royal Commission every six months.
The Royal Commission flowed from Labor's having called in 2016 for a root-and-branch inquiry into our financial sector. It wasn't a uniformly popular call in the finance sector at the time, but there are very few people now who would argue the Royal Commission was a mistake. Our challenge is implementing those Royal Commission recommendations in a way that fosters competition within the finance sector.
But that’s not the only challenge facing finance. One areas in which I think your sector will face significant change will be the role of technology – as robo advice continues to improve, and artificial intelligence models advance. Another area will be in using your strong personal relationships to match borrowers and lenders. The traditional role of the suburban branch manager was to understand who could be trusted, to be able to have those deep networks in the communities that ensured that those with great entrepreneurial ideas were able to get access to finance. In an era when major banks are shrinking their branch networks, finance brokers and mortgage brokers may well find themselves playing that role of the old fashioned branch manager: ensuring that finance is efficiently allocated.
Finance ultimately is about matching up the supply of short term savings with the demand for long term loans. It gets a bad rap. As Nobel laureate Robert Shiller has said, ‘finance is widely viewed as an activity that promotes inequality’. But he argues that in fact the industry serves a vital social purpose. He says ‘done well, financial institutions can be democratizing and can reduce inequality if they are set up right. Finance is not merely about making money. It's about achieving our deep goals and protecting the fruits of our labour. It's about stewardship and therefore about achieving the good society.’
We face significant economic challenges in Australia right now. Rising energy prices and sluggish household income growth, high inequality and problems with the degree of innovation and the number of start ups in the economy. I'd like to see an Australian economy that is better engaged with Asia, that is more competitive, which is growing at a more rapid rate and is sharing the fruits of that growth.
But it's also vital that we get the finance sector right, that the resources that are available are shared appropriately and are allocated to the most efficient causes. That when someone wants to start a business, it doesn't depend on them having rich parents, but having a great idea. Labor sees a bright future for the mortgage broking sector and we look forward very much to working with you.
Authorised by Noah Carroll ALP Canberra.