Usually when there’s a bank heist in a movie, the exciting bit isn’t the physical act of just stealing the money. After all, muggers aren’t afforded any of the romanticism that is usually associated with a heist. The thrill is in the deception, the audacity, and the kick that comes with the bank getting the wool pulled over its eyes that provides the real entertainment.
Last week saw the greatest bank heist in Australian history, except it wasn’t banks getting robbed. It was us, the consumers. You see, about 14 months ago there was this idea to have this thing called a “Royal Commission” which was going to fix all the problems us regular folk had with banks…..
The Royal Commission was originally called to uncover and punish the banks and financial institutions for their misconduct and systemic cultural issues which resulted in consumers (everyday customers of these companies) getting a bad deal or being ripped off. The commission ran for over a year, and in that time you may have seen Rowena “Shock and Awe” Orr getting stuck into bank CEO’s for all sorts of different issues within their companies. Issues like continuing to charge account keeping fees after clients had died, charging an advice fee for no ongoing service, and pushy sales tactics to get people to buy insurance products they didn’t need all came out of the woodwork. The result was many blokes in suits looking like they’d been slapped in the face with a fish, while they were being publicly castigated for the transgressions of their companies.
How surprising it was then, that when the findings of the Royal Commission were announced on Monday last week, it seems that the banks not only got off with just a slap on the wrist, but their palm was opened up, and they were given a big old chocolate biscuit to go with it.
You see, amongst the 76 recommendations made by the commissioner, Kenneth Hayne (he’s the son of a banker, by the way), a few of them were focused purely on how brokers get paid. More specifically, Hayne recommended that brokers should not be paid upfront commissions by the bank, and they should no longer get trailing commissions from the loans they write. He recommended that brokers get paid a fee by would-be borrowers instead. (Just on this point, how out of touch is this bloke that he thinks adding more fees and charges payable by a borrower in an already expensive exercise results in better consumer outcomes)?
Just making these recommendations in the first place is a bit silly for 2 reasons:
1. That wasn’t the point of this commission in the first place. Remember, it was supposed to be focused on banks. And if you feel this isn’t adequate enough, see point 2:
2. There’s already been a separate inquiry on this, the Productivity Commission, which actually was focssed on brokers on how they got paid. That commission found that the current model for how brokers being paid was fair and it resulted in better consumer outcomes than going direct to banks.
Before I go any further, I’m just going to bust out some stats here:
· 96% of borrowers are very satisfied with their brokers.
· 79% of borrowers have no concern with broker remuneration.
· 96.5 % of borrowers are not prepared to pay a fee for service to a broker.
· 59% of mortgages are originated by brokers.
· This is the big one so pay attention here: Out of 6522 complaints in the first month of the new AFCA scheme (basically where you complain if you’ve had a bad experience with someone in the financial services industry), mortgage brokers accounted for only 29 of those complaints. That’s right. Brokers account for only 0.5% of the complaints in the financial services industry.
So with all the above considered it kind of begs the question, what did brokers do to get thrown under the bus so badly during an inquiry focused on the banks? Why did banks consistently blame brokers for their own problems, even though brokers make up only a tiny portion of the actual issues in this industry? Doesn’t the above show that brokers are kicking goals for their clients, or at least, that we’re better at providing a particular financial service than a bank is?
This graph here speaks volumes about exactly why big banks don’t want brokers in the market:
Very simply, the above graph shows that the net interest margins for the 4 largest banks in Australia have decreased consistently as brokers have gained more market share. Brokers offer their clients a choice, and this choice means that many smaller lenders are able to get their products out there via the broker channel, something they would otherwise struggle to do without this channel. With increased competition, the net interest rate margin across the country has decreased significantly as the big 4 have had to compete on price in order to stay competitive with smaller lenders. Chalk that one up as a huge win for brokers and a gut punch for the big 4 banks.
The financial incentive for the Big 4 banks to get rid of the broker channel is immense. That chocolate biscuit I mentioned the banks got given before? This is it. In the first day of trading after the findings of the Royal Commission were released, over $21 billion was added to the share values of the Big 4. $21 billion. In one day. That’s a decent take, even by Ocean 11 standards.
A reduction in competition via stifling the broker channel is an absolute boon for the Big 4 banks. As they have the largest branch network, many clients will end up being naturally funnelled back into these banks should the broker channel become less viable. As market share is re-gained by the banks, you can absolutely expect the reverse of this graph to occur; that is, a steady increase in interest rates as competition is relaxed. The other thing not taken into account here is that an increase in traffic back to the Big 4 will result in more staff being needed, more wages to be paid, and therefore, more costs passed onto the borrower, again in the form of interest rate rises.
Many investors who benefited from this $21b share jump recognised the royal commission recommendations for what they were: a way to consolidate the power of the Big 4 banks, ultimately leading to larger profits for their shareholders, and lighter wallets for their customers. Unfortunately for us, the bank did all those exciting things we love to see in movies. Misdirection, deception, and the commissioner getting the wool pulled over his eyes by the banks.
Really, when considering all of the above, the only question that should matter is “did the royal commission punish the banks for their misdeeds and help consumers”?
The answer is an emphatic “no”, and I’d bet all my Big 4 bank shares you won’t get a chocolate biscuit either.
Want to know more? Here’s a video on what the Royal Commission means for brokers, and our thoughts on the unfolding matters: