Reform of the mortgage broker industry in Australia

With property markets booming over the past decade, it’s easy to see why the mortgage broking industry has expanded as rapidly as it has in Australia. But with an ever increasing number of mortgage brokers joining the market, and with little regulation, especially when compared to other financial services providers, is it time for reform of the industry?

The rise of mortgage broking in Australia
The Australian mortgage broker industry has grown from virtually nothing 15 years ago into a $100 billion industry today. This rapid growth has occurred due to two main reasons:

• The seemingly insatiable appetite of Australians for property.
• The explosion in consumers’ choice of home loans offering different features, interest rates and fees and charges.

How is the mortgage broking industry regulated?
Generally, there isn’t any comprehensive regulation of mortgage brokers in Australia, as there is say, for the financial planning industry, which is tightly regulated.

In each state, mortgage brokers are regulated to some extent by the Consumer Credit Code or its state equivalent. Only in New South Wales, Victoria, the ACT and Western Australia does state legislation apply specifically to mortgage brokers. And currently, mortgage brokers are only subject to minimal disclosure laws. As far as licensing for brokers goes, only Western Australia has requirements that mortgage brokers need to satisfy before being able to practise.

While ASIC is responsible for some regulation of mortgage brokers, this is minimal and includes for example, the prohibition of:

• unconscionable conduct and misleading behaviour
• making false or misleading representations.

If a breach of ASIC’s regulations does occur, ASIC can take action against a mortgage broker.

Is there a need for reform?
Is there a need for widespread reform of the mortgage broking industry in Australia?

John Symonds of Aussie Home Loans predicts that “a combination of government and self-regulation, and a softening market will ensure that the few shonky operators will be weeded out. But the industry is headed in the right direction and the main players will continue to lift their level of service and product innovation…”

And it appears that many borrowers are happy with the level of service provided by their mortgage brokers. According to the Fujitsu and JP Morgan mortgage industry report, released in October 2005, “most borrowers believed brokers were impartial advisers who would helpfully guide them through the maze of home loan choice”.

Recently, there has also been some criticism of mortgage brokers recommending mortgages that provide them with the highest commissions. However, in a media release dated 21 October 2005 from the Mortgage Industry Association of Australia (MIAA), Chief Executive Phil Naylor said that “appropriateness of the product, overall cost benefits, the quality of service and the reputation of the funding organisation were more important factors when a broker made recommendations to customers.”

He went on to add that “there is no more than 10 basis points difference between the highest and lowest commission that the main lending institutions pay. This represents only $200 or so on the average home loan, which will not prompt the broker to favour one institution because of size of commission.”

While the mortgage broking industry appears to be headed in the right direction, further regulation, whether self regulation or government regulation, seems inevitable.