Royal commission into financial services: what does it mean for borrowers?

Marty McDonald - Tuesday, April 10, 2018

If you haven’t been living under a rock, I’m sure you’re aware that there’s currently a royal commission being conducted into the Australian financial services industry. The first two weeks of sittings have mainly focussed on home loan lending, motor vehicle finance and credit cards. The first hearings were dominated by questioning on how major banks verify (or don’t verify) borrowers living expenses. The reliance on living cost benchmarks has come under intense scrutiny. There has also been a lot of negativity around mortgage brokers and the role they play in the wider mortgage market. The role commission play in incentivising poor conduct etc. The commissioner doesn’t appear to be a fan of brokers at all!

What does this all mean for borrowers?

Based on the current Royal Commission discussions we predict much tighter regulations around verification of expenses including general living expenses. We have already seen this tightening play out with a recent application where 7 months of banks statements were scrutinised to arrive at an average monthly living cost expenditure figure. We then had to go through the statements with our client and try to pick out discretionary and non-recurring expenses. Not easy and very time consuming for all involved.

We expect formal announcements and lender policy changes to follow. Some lenders have already moved. In a note sent to brokers last week, Westpac and its subsidiaries revealed that from Tuesday, 17 April, the group will update its credit policies to enhance the way it captures living expenses and commitments as well as the requirements around verification.

ASIC have said that their default position is living costs are assumed to be understated if they are declared below or close to the commonly used living expense benchmark (HEM). Even though this is meant to be an average or median figure (albeit a conservative one)!

The RC, brokers and the major banks

The Royal Commission focussed a lot around how brokers didn’t verify living expense. How brokers had an incentive to underestimate living expenses (and other expenses). I contest as a broker we only work within the framework of the lenders polices. The banks themselves make the lending policies, serviceability tests and the dictate what documentation is required for assessment. They are solely responsible for ultimately approving the loan. Brokers act for their clients not the banks.

When ASIC made the framework for the Responsible Lending Act they ensured lenders / banks could not rely on the information brokers provide solely.  They are required to make their own verifications which is entirely appropriate. No passing the buck!

This last few weeks however we have seen 2 of the majors use the RC noise to deflect the conversation from being about their own short comings to recommending changes to brokers remuneration. My question is how did we get here and how does the interest of the borrowers fit into this? For 99 % of borrowers it doesn’t!

If you want to borrow in the future it will be harder 

Bottom line, now might be the best time to do further borrowing, cash outs etc. I can only see less credit available in general in the wake of these changes.

About the Author: Marty McDonald is principal of mortgage broker “Mortgage Experts”. Marty specialises in assisting active property investors with loan structuring advice and implementation as well as helping credit worthy borrowers with slightly outside the box income and employment situations. Find Marty on  and LinkedIn.
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