In his recent report on the Royal Commission into misconduct in the banking, superannuation and financial services industries (the Report), Queen's Counsel Kenneth Hayne recommended a number of changes which, if implemented, could alter the landscape of financial services (including the way mortgage brokers operate and are remunerated) in Australia.
Shariah compliant financiers of Australian real estate should be alive to the potential for change — and the opportunities that could follow.
What are the relevant recommendations?
Certain aspects of the recommendations that touch on mortgage finance in particular, if implemented, could affect the day-to-day operations of Shariah compliant financiers and the way they market to clients. Relevant recommendations provide that:
- in the residential market, mortgage brokers should be required to act in the best interests of the relevant purchaser, not the financier (noting that current remuneration structures oft en create the opposite result)
- the purchaser of the relevant financial product (rather than the financier) should pay the mortgage broker for its services. The Report intimated that this takes place by prohibiting financiers from paying commissions to mortgage brokers and aggregators (with a proposal for a phased introduction over a three-year period commencing with a ban on trail commissions from the 1st July 2020), and
- mortgage brokers should, over time, be regulated by the law that applies to entities providing financial product advice to retail clients.
Where are the likely impacts for the Australian credit market if the recommendations are implemented?
Against the backdrop of an impending federal election, the extent to which and how the recommendations will be implemented is not yet clear. Nonetheless, all financiers should consider the potential impact of the recommendations on:
- the consolidation of existing participants — if legislation was to be passed prohibiting commission-based fee structures, mortgage brokers may seek upfront payment for their services from purchasers (rather than financiers). If purchasers remain reluctant to pay these upfront costs, they may limit the scope of their search for credit and instead seek finance from wellknown established players in the market. Over time, such a trend may be self-perpetuating and lead to the consolidation and further growth of the established bank lenders
- the effect on existing financier funding models — if the recommendations are implemented, financiers may need to review their existing product mix and current distribution channels. In particular, financiers may need to consider whether there will be a need for them to invest in new methods of delivery to ensure compliance with any proposed changes, and
- the increased need for finance amidst a tightening domestic credit market — residential purchasers may find it increasingly difficult to obtain acquisition finance in the face of the twin headwinds of tightening credit markets and a paucity of information on financiers. These macroeconomic trends are likely to remain salient for all financiers in the future.
Where are the opportunities?
Depending on their positioning in the market, different financiers may seek to leverage their expertise to take full advantage of the strategic opportunities arising out of any legislative change following the release of the Report. Consider, for example:
- the need for 'warehouse' facilities — in the context of a tightening domestic credit market, developers may seek to secure 'warehouse' debt facilities to provide on-lending facilities to purchasers who are unable to obtain bank finance (or a developer who is willing to provide vendor finance). Th is may present an opportunity for developers to engage nonbank financiers to provide such debt facilities to assist end purchasers settle on the acquisition of residential developments
- the strategic window of opportunity and market consolidation — prior to the proposed changes to mortgage broker remuneration, there may be scope for non-bank financiers to fully capitalize on the window of opportunity that is currently available to grow market share in the Australian credit market before any potential consolidation of the 'Big Four' players takes hold, and
- the need for further engagement with the legislative process — financiers involved in activities which may be viewed as analogous to broking (eg asset-based commodity transactions) should engage in the legislative process to ensure they are not unintentionally caught by the proposed mortgage broking restrictions.