Bank systems hinder mortgage advisers, regulator says

Wednesday, 21 August 2024

Mortgage advisers have become a power in the home loan market, but slow bank systems are holding them back, the Commerce Commission says.

Mortgage advisers arrange more than 60% of new home loans but changes are needed for them to drive competition to force down mortgage rates, the Commerce Commission says.

The commission released its report on its market study into retail banking on Tuesday to advise the Government on what needs to happen to reform the uncompetitive banking sector in which the big, Aussie-owned banks continue to show globally high levels of profitability.

Among dozens of recommendations, including beefing up Kiwibank, the commission wants to see reforms of the increasingly powerful mortgage broking market.

Mortgage advisers have become a force in selling home loans, the commission reported. In 2014, just under 30% of new lending and about 11% of repriced lending was facilitated via advisers. By 2023, those figures had increased to 66% and 20%, respectively, it said.

Mortgage advisers told the commission that in Australia the big banks have invested heavily in systems that make it easy for mortgage advisers to shop around for the best value loans for their clients.

However, in New Zealand, mortgage advisers have to put up with inefficient, slow and ageing systems at the big four banks.

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The commission concluded the mortgage advisers are right, but it also said mortgage advisers needed to be more open about the limitations of their services, and whether they were putting the lowest priced offers before their customers.

“Mortgage advisers and banks should make changes to promote price competition and choice for home loans,” the commission said.

“Banks’ processes need to improve to make it easier for mortgage advisers to submit multiple applications on behalf of their clients and more efficient for lenders to quickly process loan applications.”

Leigh Hodgetts, manager of the Finance and Mortgage Advisers Association, said she was very happy with the commission’s report, especially in recognising the limitations in banks’ processes and systems.

“Investment in technology is a huge issue,” she said.

What was needed was a single platform through which brokers could submit applications to multiple banks at the same time, she said.

“It most likely will be an independent fintech company that will come up with the solution,” she said.

Mortgage adviser Hamish Patel is not impressed with all of the Commerce Commission’s recommendations.

However, Hodgetts and mortgage adviser Hamish Patel were not impressed with the commission’s recommendations on changing the way advisers work with their clients.

The commission recommended advisers, where possible, should present at least three actual offers to each client.

And: “Mortgage advisers should highlight gaps in their panel to clients and identify any superior headline rates offered by providers outside of their panel.”

A mortgage adviser’s panel is the list of lenders it can recommend loans from, and not all adviser panels cover every lender on the market.

Patel described that second idea as “insane”, and could not think about any other kind of business that was required to point out to customers when rivals could provide better deals.

In Australia, mortgage advisers had a best-interest duty to their clients, the commission said.

“It is worth noting that we do not have an explicit best-interest duty for financial advisers in New Zealand. Advisers must provide advice that is suitable and put their clients’ interests ahead of their own,” it said.

Mortgage advisers are regulated by the Financial Markets Authority under relatively new laws.

“It is too early to assess whether the current New Zealand mortgage adviser regulatory regime will effectively promote pro-competitive behaviour from the banking sector,” the commission said.

“However, Australia provides a clear example of how the adviser channel can do more to support competition between lenders while continuing to be predominantly paid by commissions.”.

There are other changes recommended by the commission that could empower mortgage advisers, and mortgage competition.

These include changing lending laws to make it much easier for people who have existing home loans to switch to a new bank without having to jump through excessive responsible lending tests as if they were a new borrower.