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Last week’s release of Commissioner Kenneth Hayne’s interim report has made the banking industry hold their breath and it’s no surprise that property prices have fallen since the Royal Commission hearings began back in March this year. With the report emphasising the increased risk to borrowers,
Mr Haynes overarching two-poles message highlighted that at times we forget that the banks “pursuit of profit” and their ongoing attitude towards consumers as a “measure of success” is what drives their often (but not every time) less than impressive conduct.
The astonishing misconduct brought to light throughout the Royal Commission hearings suggest that banking institutions are more often than not prioritising higher sales targets and profit outcomes over risk, compliance and producing the best possible solutions for their consumers. Combined with tightening lending criteria and additional fees and charges, many prospective borrowers are looking elsewhere for better outcomes.
If there is one thing we can take away from Hayne’s report it’s that responsible lending needs to be re-implemented within the financial sector. The monumental evidence of lenders routinely breaching responsible lending laws collated by the commission has called for a thorough review of the standards, including those processes used to evaluate a borrowers ability to repay their loan. What is of particular concern to majority of the major banks is that even despite the significant tightening of their home loan assessment procedures, these stricter measures are still failing to satisfy. In Mr Hayne’s words, “compliance appears to have been relegated to a cost of doing business” – and the efforts by the banks to evaluate potential consumers is being seen more and more as an opportunity for a sale (and thus a profit) than a necessary exercise in gathering information with which to determine for the consumer their most appropriate and viable solution.
In particular, the report reflects the issues with the Household Expenditure Measure (HEM) and advocates future movement away from such a model, due to its countlessly evident ineffectiveness. Hayne recommends even eliminating the use of HEM altogether and determining a more rigid and accurate assessment criteria the best assess prospective borrowers suitability. In response to some rough nudging from APRA, many financial institutions are anticipating this change already and have begun the shift away from the HEM, with the addition of further enquiries becoming necessary to apply the measure to any submissions.
One of the biggest questions coming into view as a result of the hearings is whether or not the broker commissions’ scheme will change. There is a lingering stigma surrounding the mortgage broking industry that brokers are associating upfront and trail commissions to larger loan sizes that may realistically be unsuitable for their clients. Hayne reiterates this by stating “No matter whether the motive is called ‘greed’, ‘avarice’ or a ‘pursuit of profit’, the conduct ignores basic standards of honesty.”
De-linking these incentives from the value of the loan has been considered as a beneficial move however there are many that believe that simply more honest and open disclosure of remuneration will be enough to encourage brokers to pick up their acts. Although it seems unlikely that Hayne will move towards prohibiting commissions totally, it has definitely become clear that brokers are going to be required to up their game. It’s becoming apparent that a more progressive route for the commissioner to follow is to continue to strive towards a flawless regulatory system, to develop a space for brokers to better function in the interests of their consumers. Improved training and licensing in the industry is also going to be beneficial in aligning the broker’s interests and the borrowers’.
The banks themselves are not innocent in this regard either, with an overwhelming amount of evidence being brought to the Royal Commission that highlights the trending importance of an entity’s revenue and profit over the outcomes of it’s consumers. “Employees of banks learned to treat sales, or revenue and profit, as the measure of their success”, Hayne argues in his interim report. The banks are changing their approach, albeit with varying degrees of enthusiasm, as they have worked to realign remuneration schemes for their employees to encourage improved standards of behaviour and attention to the needs of their consumers.
So what will be the steps taken to ensure that conduct in the industry improves? It could be as simple as reviewing the existing regulations to ensure they reflect the fundamental principles that consumers should not be misled. At the end of the day in an industry dominated by consumer lending, it makes sense that the priorities of it’s players are to ensure that the interests of the consumer are put first.
The final round of the Royal Commission hearings in Sydney begin on November 19, and these will no doubt determine the policy responses and amendments required to mitigate the misconduct that has been brought to light.