Justice Hayne’s much anticipated Royal Commission Final Report was publicly released by the Government yesterday.
The aim of the Royal Commission – which is the highest form of inquiry into matters of public importance – was to expose any wrong-doing in banks, insurance and superannuation companies.
The Royal Commission Final report contained 76 recommendations to improve consumer outcomes across multiple areas including banking, financial advice, superannuation, insurance, as well as cultural governance and remuneration.
The Government has since agreed to adopt 75 of the 76 recommendations, the key exception being a recommended change to the mortgage industry.
Mortgage industry shake up
Currently, mortgage brokers receive upfront and trailing commission from banks and other lenders. Justice Hayne recommended:
- that lenders be banned from paying trail commissions to mortgage brokers for new loans
- mortgage brokers to act in the best interests of the intended borrower, not the bank providing the loan – with fines for any breaches
- borrowers rather than lenders should pay the mortgage broker for their services
- expanding the Banking Executive Accountability Regime laws to track those responsible for any breach of lending laws
However, the Government will not immediately adopt a borrower-pays model, saying it may decrease competition in the mortgage industry. The Government initially said it would ban trail commissions on new loans from July 2020, however in March 2019 revised its position.
“After consultation with the mortgage broking sector as well as small lenders, the Government has decided that the trailing commission issue will now be the subject of the review by the ACCC and the Council on Federal Financial Relations in three years’ time… so the abolition of trail commissions from July 2020 won’t proceed as first announced,” said Federal Treasurer Josh Frydenberg announced on 12 March 2019.
The Government says it will conduct a review in three years to consider the implications of removing upfront commissions and moving to the borrower-pays model.
Impact for Property Investors
We see three key factors which will likely impact property investors over the short, medium and long-term as a result of the Banking Royal Commission.
No further tightening of lending
One of the key themes of the Final Report was evidence of irresponsible lending practices by the banks.
Responsible conduct obligations require that banks take reasonable steps to verify a borrower’s income and expenses. However, the Royal Commission revealed that banks do not always follow these obligations, which leads to unnecessary risk for borrowers and the broader financial system.
The Royal Commission has brought a renewed focus on the importance of ensuring that all lenders comply with Responsible Lending conduct obligations.
The Final Report did acknowledge that some banks had already improved their lending practices over the past six to nine months, in anticipation of the Royal Commission Final Report.
The Report contained no recommendations for further tightening of lending practices, noting only that existing lending standards should be maintained.
As a result, the Royal Commission is expected to have little to no further impact to lending beyond what has already occurred.
Underlying market fundamentals remain sound
Although credit conditions are anticipated to remain constrained in the short-term, interest rates remain at historic lows and supply and demand fundamentals are robust – evidenced by the national vacancy rate of only 2%, the lowest level since early 2014, according to SQM Research.
At the same time, population growth remains strong and new residential building approvals are down by a steep 24.7% year on year, as at November 2018. These broader trends suggest that future supply is declining, while demand is continuing to strengthen.
Meanwhile, macroprudential policies aimed at reigning in house prices, particularly in Sydney and Melbourne – such as APRA-driven limits on investor lending, and interest-only loans – have now been removed, as the desired impact has already taken place.
A more resilient and robust financial system
For investors, the Royal Commission should be seen as welcome news as it will help to strengthen, what is by international standards, an already strong and stable financial system in Australia.
The Royal Commission revealed that there is still much to do to ensure the resiliency and strength of our financial system over the long term. Maintaining public confidence in the nation’s lending institutions will be paramount, however the Government will be aware of the potential implications that any practical response may have on the economy and the free-flow of credit.
Ultimately, the recommended changes in the Final Report are a sensible and necessary approach to improve on current practices. Banks have been shown to prioritise profit over its customers to the detriment of the wider economy. The push to increase regulator powers and oversight would help to ensure that existing legislation and regulation is prudently followed in the best interests of society at large.
As a whole, this will mean that our financial system will be more stable, robust and reliable moving forward – and this is something that everyone (including property investors) will benefit from.
At Ironfish, we support the greater and necessary emphasis on prudent lending practice and serviceability, which will ultimately benefit Australian property investors and the broader financial system.
Ironfish Property Investment Australia
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*This article was updated on March 13 to include new information and updates from the Government.