Speaking on an episode of The Smart Property Investment Show, Ben Kingsley, broker and director at Empower Wealth and chair of the board of directors at the Property Investors Council of Australia, said he is in favour of the introduction of a best interests duty and test for brokers, as recommended by commissioner Kenneth Hayne in his final report for the banking royal commission.
“I could show a customer through careful money management – and we go deep into cash flow movements every month for the next 40 or 50 years – that that borrower can safely borrow another $100,000. And let’s say instead of buying a $400,000 property, they bought a $500,000; they could be, if we have the same type of return, about $300,000 better off,” he explained.
“So, if I have a best interest test, [then] that says to me that I can’t advise my client – based on the analysis of the cash flow that I’ve done – that they shouldn’t push the envelope a little bit harder to borrow a little bit more.
“Whereas, if I went to [a] branch and they’ve got one servicing calculator, that one servicing calculator maxes them out at a certain point.”
The Empower Wealth director also warned of the adverse consequences of introducing a fee-for-service model – where the borrower pays a mortgage arrangement fee to brokers and lenders – saying that it will lead to “contraction in terms of the choices you have”.
This model was proposed by commissioner Hayne as an alternative to the current lender-paid upfront and trail commission structure, which has been intensely scrutinised for being “conflicted”.
The idea, which was presented in the final royal commission report, sparked fears over the longevity of the mortgage broking industry and the impact on consumers, should such a drastic change be legislated.
Consumers might not be able to afford the fees attached to mortgage advice, resulting in the reduced ability to access the right loan products (including products from the smaller lenders), and those who are able to afford the fees could inherit significant costs that the banking sector previously absorbed.
For this reason, as Mr Kingsley suggested, the fee-for-service model may be a contradictory recommendation to the best interests duty.
Despite the government stating it would implement all of commissioner Hayne’s recommendations, Prime Minister Scott Morrison showed hesitance towards the recommendation to eliminate lender-paid broker commissions, saying that he doesn’t want the broking sector to “wither on the vine and be strangled by regulation that would throw them out of business… [and] deny choice and competition in the banking system”.
“If there is one thing that we have learned through this process, it is that we need more competition. We need more options. We need more choices. Not fewer. And that is what the Treasurer and I are concerned about in terms of how we would go forward on that one recommendation [on broker remuneration],” the Prime Minister said.
Regarding the major political parties, Mr Kingsley said that the government’s initial response to adopt every recommendation is slowly trickling back.
He continued, “I suspect they are a little bit surprised by the groundswell of support for people in terms of using brokers because they came out before the royal commission.
“Now, everyone’s been sort of backed into a corner, both Liberal and Labor.”
Listen to the full episode of The Smart Property Investment Show here.
The Best Interests Duty needs to be brought in for all financial product sales. Particuarly those products sold under general advice
Lol! A property spruiker… If property became a regulated asset with BID & SoA’s they’d all shut up shop. Property spruikers is where the attention is needed most as Australians are all too ready to trust in the property market and max out their debt levels.
Your comments are correct – lets just hope that ASIC staff (as well already know many Politicians have) have borrowed to the hilt on property.
and no one understands the seriousness of this but it will be regulated once we have a monumental crash which is underway now. people on $80k borrowing $2m utter madness.
These brokers keep yapping about Best Interest Duty as if it is as simple as acting in the best interests of a customer. Imagine if they knew what was involved to actually meet those requirements to a ASIC standard.
give them one SoA to do. they will all faint.
the banks won’t allow BID into lending. that’s their core business and if you do that then they’d have to do an SoA and advise clients :
a. you are over geared
b. into a single asset class
c. you should diversify
d. and not enter into any further borrowing arrangements
how would that work?
mortgage brokers won’t survive. they will be gone without trail income. most of them have way too many staff servicing clients ongoing. the banks win.
Is he seriously suggesting that a Best Interests Duty for brokers would oblige them to recommend borrowing more even money for property speculation?
Now that’s Orwellian!
“fee for service model may be contradictory to best interest”
The same argument exists in the financial planning space, but it’s apparent that either
1. Your wrong
2. BID is not the motivator in mandating for fee for service.
3. The regulator and many industry commentators are wrong in believing you’re wrong.
Fortunately there’s evidence around the world to test the logic behind whether or not our system is worse or better than others.
When the U.K went through a similar transformation in abolishing commissions. Access to advice plummeted, upfront fees doubled and ongoing fees increased by 66% but lets push on anyway…. maybe it will be different here?
we need the same financial regulation for all financial professionals. that should include, mortgage brokers and lawyers, (accountants have now been drawn into the AFSL framework already)
once the lawyers are drawn into it and they have to adhere to the BID and disclosures, as we do, then they will lobby the government to change everything because, “consumers don’t want to be inundated with ineffective disclosures”
we need to lobby hard to bring lawyers into the AFSL framework and tie them up with red tape just like us.
most lawyers should earn no more than $77k pa.
LAwyers, the honest ones, will tell you that they work towards making both parties unhappy. the one who thought they’d get millions, doesn’t, and the one that thought they’d have to pay nothing will still have to pay something….and of course theres the pre-case discussion that confirms you should enage because you cannot lose…BID will stop this element of misconduct.
honest lawyers, is an oxymoron. [b]there is no such thing.[/b]
I was being kind…LOL!