AFG response to the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and the Financial Services Industry

Last Friday AFG provided?our response?to the Royal Commission’s Interim Report.

We are of the view that the erosion of public confidence in the major banks and their failure to meet community expectations is inextricably linked to the immense market power that they wield.

We have told the commission the competitive tension delivered by a viable mortgage broking channel is vital to help limit oligopoly behaviour in an industry that is dominated by the four major banks. The clear majority of mortgage brokers are small business operators with customer service at their core. Without the delivery of good consumer outcomes, you would not have sustainable businesses and broker market share would not have grown to record levels.

The Commissioner questions the remuneration structure of the industry, levels of disclosure and in whose interest brokers act. Industry has acknowledged the concerns raised by ASIC after its extensive Broker Remuneration Review, and the Combined Industry Forum (CIF) has developed clear actions to address potential conflicts of interest. Clearer disclosure, a customer first duty and changes already underway to remuneration structure address concerns raised by the Commission. This is consistent with the approach suggested by both Treasury and ASIC and, together with ASIC’s new regulatory powers, needs time to become entrenched.

The Commission has also raised consideration of the extension of FOFA-style regulation for the industry. We contend that the services provided by mortgage brokers have both similarities to and differences from, the services provided by financial advisers.

It is simply not appropriate to replicate the personal financial advice regime and apply it to mortgage brokers without considering the differences and the effect that each component would have on every Australian homebuyer and the Australian economy as a whole.

In examining the remuneration model, it is important to reflect on Treasury’s submission that stated the balance of responsibility and interests must be carefully weighed. A model that is too prescriptive risks being commercially inefficient and having a negative effect on competition.

Such a move would result in the uneven playing field being further skewed towards the major banks and away from efficiency and competition. An outcome that would be celebrated by the large lenders.

AFG will continue to advocate for our industry, competition should not be the inadvertent casualty of reform.

Click here to?read our submission

AFG Mortgage Index – Q1 19 – Home lending in a holding pattern

AFG Mortgage Index figures released today show the country’s lending in a holding pattern with first home buyers the only category of buyer to record an increase for the first quarter of the 2019 financial year.

The volume of mortgages processed by AFG declined 2% on the prior quarter. AFG brokers lodged 27,900 mortgages during Q1 19, totalling $14.2 billion, compared with 28,883 mortgages and $14.5 billion in the final quarter of the 2018 financial year.

AFG CEO David Bailey explained the results: “As the Financial Services Royal Commission continues to rattle the market Australian homebuyers are feeling the pinch as lenders tighten their borrowing criteria. Compared to the same quarter last year, lending volumes are down by just under 5% – a sure sign of a tightening market. The availability of credit has impacted investors most of all, with that category dropping by 1% to 27% of loans processed. Refinancers were steady at 23% and Upgraders were also static at 43%.

New South Wales and Victoria are both down on the prior quarter, 2.5% and 6% respectively. Queensland also recorded a drop across the quarter, down 2%.

Gains were recorded in SA – 2% up on last quarter, NT – up 22% and WA with an increase of 6% for the quarter.

Loan to Value Ratios (LVR) have increased in SA, NSW and WA.

The national average loan size has increased to a record $509,736, led by increases in average loan sizes in NSW, SA and Victoria.

“NSW has recorded an increase in average loan size of 3%, which we suspect is the result of a drop in apartment sales and lenders tightening criteria to investors – which are usually a lower average loan size. Both factors are driving up the average overall loan size in that state.

During the quarter many lenders moved to increase interest rates independent of the RBA, causing many borrowers to rethink their arrangements. “With the recent round of rate rises flowing through, many consumers have been speaking with their brokers to discuss the value of fixing all or part of their loans,” he said.

“Fixed rates have risen to 18.9% of loans by product category, whilst standard variable loans dropped to 64.3%. Basic variable products are also back in favour, increasing to 11.2% of all loans.

The major lenders clawed back some market share during the first quarter of the new financial year to now be sitting at 59.8%. This figure is still well below the high 70’s they had back in 2013, and much lower than they record outside of the third-party channel.

“The major lenders took some share from the non-majors after treading cautiously for the prior two quarters. The non-majors are still sitting at near historical highs with 40.2% market share after peaking at 40.8% last quarter.

“This is further evidence of the value brokers deliver to competition in the Australian lending market. Refinancers (55.5%) and Upgraders (60.5%) are favouring the competitive offers available from the non-major lenders.

Download full report here

Factors affecting our property prices

While prices are a product of supply and demand, it’s worth understanding the factors that sit beneath both sides of the equation. In other words, what drives supply and what drives demand?

Incomes

Higher household incomes, thanks largely to two-income couples, have seen Australians seek better quality housing, invest more in property and bid-up pricing. It has since become something of a vicious cycle, with property prices putting extra pressure on households to earn more to keep up with mortgage?demands.

Demographics

As our population clicks over 25 million, migration continues to be strong in Australia, with many new arrivals settling in major cities. This has led some experts to recommend curbing migration to manage growth. Even without migration, however, our housing stock has struggled to keep up with demand in some cities, especially because we have long made a practice of living around our continent’s edges. Others believe we need migration to supply the trades and workers to build the houses we?need.

Our households have also shifted from a typical nuclear family (mum, dad and 2.2 children) to more single households or couples with no kids, which has changed what we want in a?home.

Interest Rates

Low inflation has helped keep interest rates in check for a long time. While low interest rates have been welcomed by borrowers, they have also given households more disposable income with which to bid up prices. So, what we gained on the ferris wheel, we may have lost on the affordability merry-go-round. There’s speculation many borrowers may be caught out financially when interest rates inevitably head north, so make sure you have a buffer to manage any?increases.

Investor lending has also tightened, with higher interest rates for investment loans and a more recent crackdown on interest-only loans having the desired cooling effect in heated markets, such as?Sydney.

Talk to us to check your loan is still right for your situation. We have access to multiple loans across a range of lenders, giving you more options to save on interest and pay your mortgage off?sooner.

Speculation

In a recent Parliamentary Inquiry into housing affordability, one witness said “houses are being valued as speculative assets” more than they are?homes.

While Australians have long viewed bricks and mortar as a sound investment, financial speculation could be fuelling demand more than our desire for a roof over our head. Investors now account for about a third of new home loans, which is why the banking regulator stepped in with tighter lending requirements for?investors.

The RBA has opted to leave the official cash rate on hold at 1.5%.

The Reserve Bank of Australia has decided to leave the official cash rate unchanged at 1.5% for the 26th consecutive time. I’d like to share today’s rate announcement and the thoughts on why the Reserve Bank of Australia has made this decision.

In making this decision the RBA looks to have balanced low unemployment, strong trade figures and increasing business and public sector infrastructure investment against continued low economic growth, falling house prices and slow wages growth.

Out of cycle rate increases by many lenders has also taken some of the pressure off the RBA to lift rates.

With lenders increasing rates independently of the RBA, it is important to review your lending options regularly to ensure they remain the most suitable for your situation. There may be different rates available from our wide panel of lenders and I’m always available to ensure you have the right financial solution for your current and future circumstances.

If you’d like to have a chat about what today’s news means for you and your finances, please don’t hesitate to?get in touch with an AFG broker.

Release of Royal Commission interim report

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released on Friday 28th September. AFG will respond to the Commission’s call for submissions addressing the issues raised about the role of intermediaries.

It is important to remember the current Royal Commission was tasked with reviewing misconduct and by its very nature has highlighted those instances where conduct has fallen below community expectations. AFG has always maintained that the clear majority of mortgage brokers are small business operators with customer service at their core. Without the delivery of good consumer outcomes, no mortgage broker would have a sustainable business.

The erosion of public confidence in the major banks and their failure to meet community expectations is inextricably linked to the immense market power that they wield. We will be telling the Commission that any action taken to disadvantage the mortgage broking channel will impact Australia’s non-major lenders, consumers, the tens of thousands of small business people working as mortgage brokers, and risks handing more power to the major banks.

As Treasury noted in its submission to the Royal Commission, the balance of responsibility and interests must be carefully weighed. A model that is too prescriptive risks being commercially inefficient and have a negative effect on competition.

AFG will continue to work through the Combined Industry Forum (CIF) to implement the changes agreed upon to address potential conflicts of interest. The changes require a reasonable period to become embedded into the processes, procedures and culture of individual broker businesses and once that has occurred it will be an appropriate time to again review the extent to which community expectations are met and good consumer outcomes are achieved.

We will also be telling the Commission that the definition of a ‘good consumer outcome’ articulated by the CIF is an appropriate measure of ‘best interest’. The definition looks at the size and structure of the loan, affordability, responsible lending requirements and individual customer needs.

As always, I would encourage you all to continue to deliver the vital service and support you provide to your clients and AFG will continue to support you to do so. We will be meeting with government and regulators this month as we draft our response to the Commission and will share that with you when it is complete.

David Bailey
CEO