Labor backflip on mortgage brokers earns ridicule from Treasurer

Labor has walked back from a commitment to implement all of the banking royal recommendations in full.

Treasurer Josh Frydenberg. Picture: Kym Smith

Bill Shorten says Labor’s ditching of the most controversial recommendation from Kenneth Hayne’s royal commission, relating to mortgage brokers, will still be “implemented in a manner that will achieve the objectives “set out by the former High Court Justice”.

Labor today released its full response to the banking royal commission recommendations, in which it walked back from a commitment to implement all the recommendations in full.

While Mr Hayne made 76 recommendations, Labor has pledged to implement 75 “in full” after a sustained campaigned from the mortgage broking sector over proposals to rid the industry of commissions, which would dramatically change the business model of the sector.

“Labor has listened to experts including the Productivity Commission and the Governor of the Reserve Bank of Australia, and we recognise that moving to a customer-pays model in mortgage broking poses real risks to competition in the banking sector,” Mr Shorten said.

A Labor government would ban trailing commissions from lenders to mortgage brokers — usually a 0.2 per cent commission of the value of a loan paid annually over the life of a mortgage — from July 2020. It has promised to set up a flat, upfront commission for brokers that will eliminate conflicts of interest from banks competition to offer bigger commissions for a customer — limited to the amount drawn down by the borrower to ensure customers are not shunted into larger than necessary loans. The fee is expected to be around 1.1 per cent of the loan size.

Opposition Leader Bill Shorten. Picture: Gary Ramage

‘Proof brokers hurt’

Aussie Home Loans CEO James Symond said the Labor Party’s move away from the consumer pays broker model was “recognition that it would hurt the mortgage broking industry, but more importantly the millions of customers the industry supports”.

“The Labor Party has recognised that mortgage brokers provide a very important service to borrowers across Australia, creating competition in the home loan sector with 66 per cent of loans provided by Aussie to consumers from 18 second tier lenders on our panel of 22 lenders.

“It is clear from our research that borrowers will not remunerate brokers. It appears as though lenders will continue to fulfil that role, however the payments will need to be set at a level which continue to make the mortgage broker business model viable.

“We look forward to consulting with the Federal Government and Labor Party to ensure that any future changes do not negatively impact borrowers, while ensuring the ongoing viability of the mortgage broker industry”, he added.

‘Humiliating’ move

Treasurer Josh Frydenberg said Labor’s ditching of its pledge to implement all the recommendations from the banking royal commission was humiliating.

“It’s a day of humiliation for Chris Bowen and Clare O’Neil after telling all Australians that they will implement every single recommendation of Mr Hayne and that all commissions from mortgage brokers should go,” Mr Frydenberg said.

“They’re have been rolled by their caucus, their cabinet and their leader, and they have nowhere to hide,” he said.

Mr Shorten claimed the opposition’s response was much tougher than Morrison government plan. “This stands in stark contrast with Scott Morrison and the Liberals, who continue to protect the big banks and are delaying, watering down or rejecting at least 15 recommendations,” he said.

The release of Labor’s plan came as RBA governor Philip Lowe warned any changes to mortgage broker remuneration should be taken slowly so as not to damage competition in the financial sector.

“A shift to a borrower pays model could in principle work but it would need to be managed very carefully and not something that should be done quickly,” Dr Lowe told MPs at a House of Representatives committee in Sydney on Friday.

“Who should pay the fee? That’s an open question. We should take time to get that right. If the broker channel were to work effectively. As we transition to this new model it important to take time to get this right,” Dr Lowe said.

‘Step in the right direction’

Labor’s proposal is reversal of its initial plan to fully implement the royal commission proposal to shift the burden of paying the fee to the borrower, and not the lender, which would end the conflicted remuneration arrangement by forcing brokers to act in the best interests of the customer and not the best interests of the lender paying the biggest kickback. Labor claims a regulated flat fee, teamed with a plan to forced brokers to act in the best interests of members while banning any other incentive paid to brokers from lenders will ensure that conflicts are managed.

“Labor will deal with the Royal Commission’s key concerns with mortgage broker remuneration, namely conflicted remuneration and incentives that drive higher average loans sizes that may not be in the consumer’s best interests,” Mr Shorten said.

Mortgage broker Loan Market chief executive Sam White said Labor’s proposals were a good step in the right direction. “Last night, finally, common sense prevailed. Labor expressed support an end to the disastrous customer-pays model recommended by the Royal Commission,” Mr White said.

The Treasurer said this morning that Labor was a “complete mess” and playing “catch up” with the government.

“There’s only one side of politics that will stand with mortgage brokers and that’s the Coalition under Scott Morrison,” Mr Frydenberg said.

“We know that they (Labor) don’t like mortgage brokers because they don’t like small business,” he said.

“Mortgage brokers are not only respected within the community, but they are also important for competition. The Productivity Commission had looked at this issue and said that if you were going to change the fee service model it would actually reduce competition, enhance the power of the banks because they’re the ones with the big branch presence while the smaller banks do not have that.”