Sally Lindsay
The Commerce Commission has backed away from a move to force mortgage advisers to present prospective borrowers with three completed offers from three different lenders as a way of boosting price competition between banks.
It comes after Commerce and Consumers Affairs Minister Scott Simpson was pulled into the dispute which erupted after the commission wrote to the advisers’ industry body, Finance and Mortgage Advisers Association New Zealand (FAMNZ), in February, saying that unless mortgage advisers presented at least three “actual offers” and “submitted multiple applications on behalf of their clients”, the commission would recommend government intervention.
The requirement arose out of the commission’s investigation last year into competition within the personal banking sector.
FAMNZ was quick to blast the commission for devising what it called a “classic case of a solution looking for a problem”. It said if the commission followed through with its threat to recommend government intervention, this would further delay the already glacial mortgage application process and hurt consumers by driving up costs and affecting their credit rating.
Simpson described the commission’s demand as a “disincentive”.
“It’s costly for the banks, it’s costly for consumers because it adds cost to the whole process of trying to get a mortgage,” he said.
And it appears the commission has taken at least some of this feedback on board.
Speaking at a recent Finance Advice New Zealand (FANZ) conference, commission deputy chair Anne Callinan said the “recommendation” to advisers had been qualified with the words “wherever possible”.
She said the regulator appreciated it was not always possible to present that many options.
“This had proved to be a remarkably controversial recommendation and we have had many interesting discussions with stakeholders in the industry. Obviously, the characteristics of a particular buyer or borrower or time constraints might mean this isn’t feasible in a given case.”
Callinan said the commission was not suggesting advisers “should be forced to present three offers, full-stop”. She also said the commission’s real target was the major banks.
One of the overarching problems identified within the banking sector was the lack of investment in systems and processes for mortgage advisers to submit multiple applications on behalf of their clients and to make it more efficient for lenders to quickly process loan applications.
“We considered this needed to improve to reflect a more competitive market,” Callinan said. The commission did not expect an overnight turnaround but envisaged the New Zealand Bankers Association would work with the mortgage advice sector on opportunities to invest in better IT systems.
Market swamped
Those working in the mortgage advice market say if the commission gets its way, the banks will be swamped with applications and loan approval times would skyrocket as bankers are forced to do full credit assessments for loans and clients they were going to land only 33% of the time.
David Cunningham, Squirrel Mortgages chief executive, said the commission’s demand would achieve nothing in terms of delivering competition to banking. It was in no one’s interest to have full applications going to several different banks, which would result in poorer outcomes for clients and a less competitive market.
FAMNZ country manager Leigh Hodgetts said she had heard reports that real estate agents were telling buyers to deal directly with banks, rather than using mortgage advisers, because of the increased turnaround times – a move she described as “unacceptable and anti-competitive”. But the bigger question, she said, was why mortgage advisers were seeing such detrimental recommendations in the first place. In her view, the commission’s demand had put the mortgage advice industry at risk.
Hodgetts said there was a perception that the commission and some other government agencies did not understand the role played by mortgage advisers in driving competition – and, in her opinion, many did not want to understand it.
“We’d like to believe this was not the case which is why we are continuing to work with the ComCom and assist it,” she said.
During last year’s investigation into competition in the personal banking sector, the commission had floated the idea of obtaining three different offers for borrowers to help promote price competition and choice for home loans.
But mortgage advisers told the commission that this was not the right approach as price was not the only consideration for borrowers. They also wanted to know how much they could borrow, whether they could borrow on interest-only terms, whether lenders allowed loans on apartments and bare land and what the respective banks’ policies and procedures were in areas such as early repayment.
The advisers also pointed out that the big banks over the past 20 years had been telling mortgage advisers that submitting multiple applications for the same borrower was unprofessional, time-wasting and drove up costs.
It’s understood no other jurisdiction does this. In Australia, for example, it is common practice for advisers to provide clients with comparisons of what they could get from three separate lenders, but they do not have to lodge separate applications with three different lenders.
Serves no purpose
iLender founder Jeff Royle, who has 30 years’ experience as a mortgage adviser in the UK and New Zealand, says it is no big deal for advisers to apply to three different lenders as it adds only about 10 minutes to the application process. But that’s not the whole story.
“The banks know that two-thirds of mortgage applications they are processing are not going to go anywhere. It’s a fairly labour-intensive process for the banks and it’s not cheap. So who is going to pay for that? Is it the adviser? No. Is it the bank? No. It will be the consumer. And for what? Just to satisfy the ComCom?”
Royle points out that the major banks don’t give pre-approvals with a price attached. “So, even if we had to obtain three, none of them would give the borrower any indication of the interest rate they would be paying because the bank doesn’t know when the loan is going to settle. They can’t price it.”
And there is already competition among the banks when it comes to the mortgage market, he says. If, for example, he had a deal with ANZ on a client’s behalf, and then Westpac came out with a market-leading interest rate of, say, 4.99% for five years, he could go back to ANZ with a degree of confidence that it would match that rate.
“To me, that is the free market economy in action,” Royle says. “There is competition between the banks and that is where the ComCom falls flat on its face.”
Advisers had tried to tell the commission that a bank’s polices are often more important to borrowers than price, with many client being prepared to pay a higher rate to get the level of borrowing they need. In some cases, Royle said, there would be only one appropriate lender.
Not buying it
Commerce Commission chairman John Small doesn’t buy into advisers’ claims that the commission is being unreasonable and doesn’t understand how they operate.
In a recent interview on Morning Report, Small said mortgage advisers were consulted extensively during the market study and this consultation had continued. “While we don’t have the power to force them to do anything, we are trying to get a better result than the market has been delivering.”
When the commission talked to advisers, he said they downplayed the price of mortgages and talked up the value of the advice they provide. “What we want them to focus on is mortgage competition and I don’t think that is an unreasonable request.”
Part of the solution is for the banks to have the technology to make portal-based mortgage applications easier, Small said, because there was a fear that if three fully completed mortgage offers were not presented to borrowers, one bank might get preference over the others.
Squirrel’s David Cunningham said mortgage advisers were engaged with different lenders on an almost daily basis and were constantly reviewing different banks’ credit policies to help them understand who was prepared to lend and at what rates.
At any given time, advisers know where pricing is sitting across the market and this informs their recommendations to clients, he said. “Clients don’t need three completed offers. They need one and it has to be the right lender for them.”
In Hodgetts’ view, if the commission were serious about competition, it would divert its focus away from advisers, who were doing all they could to ensure consumers were looked after, to the banks themselves, which clearly see delay as a way to increase their profits.
“If these recommendations are forced upon us – and remember, this is a threat provided in writing – we will see costs blowing up for consumers as advisers juggle multiple applications and multiple credit checks, while lenders will be forced into paying for extra valuations and more staff.
“Application times will go to 30-plus days and consumers will potentially be pushed directly to the bank for quicker approval times.”
Her message to advisers: “get on board before it’s too late and let’s stand together on this.”
The number of borrowers using mortgage advisers has ballooned in the past 10 years. Applications for about 60% of the main banks’ mortgages and about two-thirds of new home lending by value are now handled through independent advisers. In 2014, this was just under 30%.
0 Comments