The bricks and mortar of regulation

Borrowers love dealing with mortgage brokers. They listen, do the hard work, and come back with a range of solutions tailored to the individual client’s needs.

Over the past five years the industry has grown dramatically, but this growth has outpaced the necessary regulation.

A small percentage of rogue brokers (and rogue lenders) have tarnished the industry’s reputation.

The repossessed home of a single-parent family or non-English speaking migrant on tabloid television is a reminder of the need for effective regulation.

Usually, the casualties of these rogues are those that can least afford it.

A growing number of Australian households are struggling financially. Money is tight. Interest rates are rising. The stock market is volatile. And there is confusion surrounding the US sub-prime mortgage crash and its impact. On average, 35 per cent of a household’s income goes to repaying their mortgage.

The industry doesn’t want to be bound by red tape, but consumers need to be confident that their broker, in whom they invest enormous amounts of trust, emotion and money, is professional and accountable.

Luckily, it’s an issue that consumer groups, state governments and the Mortgage and Finance Association of Australia (MFAA) all agree upon: the mortgage broking industry of Australia must have nationally consistent legislation.

It is essential that consumers feel protected from sharks, and, in turn, have faith in their broker.

The industry’s evolution

The industry sprang from the deregulation of the banking industry and the spate of regional bank branch closures over the past 10 years, with ex-bankers setting themselves up as mortgage brokers.

The market became increasingly competitive as the range of products grew and diversified.

Banks started seeing broking channels as an effective way to market their own offerings.

Mortgage brokers now command over 40 per cent of the market. The reason is clear: brokers consistently deliver higher levels of borrower satisfaction than banks.

Consumers see a huge benefit in brokers doing all the legwork. It frees up time for the borrower. They benefit from the availability of a wide range of loans and deal with an expert in the field. The prospect of a long-term relationship with a broker is also attractive.

But the industry is still in its infancy. Currently, anyone who acts to introduce a mortgage borrower to a lender can be called a mortgage broker.

The regulation of credit is a state-based issue, so mortgage broking regulation is also a state-based issue. There is no unified national system.

Western Australia has the most robust system in Australia. New South Wales, Victoria and the ACT require a finance broking contract, but little more.

South Australia, the Northern Territory, Tasmania and Queensland, on the other hand, have no government regulation. With no regulation or ombudsmen, the borrower has little protection.

The 13,000 members of the MFAA are bound by a strict code of practice to ensure high levels of ethical and professional conduct.

A breach of the code can result in disciplinary action and potential public expulsion. But apart from this consumer safeguard there is no national protection.

Clearly, it’s archaic dealing state-by-state and there is a need for national legislation.

In a recent consumer survey the need for legislation received loud applause, with consumers ranking it 9.55 out of 10 in terms of importance.

The survey also showed that people have little faith in existing regulatory protections. When asked to rank whether they agreed regulation was strong enough to protect their personal interests, the average consumer response was 5.53 out of 10.

So if consumers, industry groups and state governments are all on the same page, what is being done?

The regulation’s evolution

In November 2007, the exposure draft of National Finance Broking Legislation was released.

The MFAA first introduced the concept in 2002 and has since worked closely with senior state fair trading and consumer affairs officers to develop it.

It’s surprising that the process has taken so long considering the unilateral support for the legislation.

There are some aspects of the draft that the MFAA opposes.

For example, the draft makes it the broker’s responsibility to ensure the borrower can repay the loan. The broker should make every endeavour to ensure the borrower can service the loan, but surely the ultimate responsibility lies with the lender whose money it is, and who has access to the borrower’s financial information.

The MFAA also stresses the importance of a nationally administered system. Unless it is truly a national operating system, there is just no point.

However, the draft legislation overall is a gigantic step forward in ensuring consumers are properly protected and the MFAA supports it enthusiastically. It is hoped the legislation will be operational and enforceable in 2009.

The industry’s evolution won’t end once the regulation is finalised.

The legislation will simply demand a minimum standard of practice.

The MFAA will continue pushing for higher levels of broker experience, education and expertise.

The industry will also grow as it enjoys the benefits of a clean image, and attracts more and more of the ‘right kind of people’.

With regulation in place, consumers in every state of Australia will know they are dealing with reputable, informed and ethical brokers. Rogue operators, thankfully, will be squeezed out.

Phil Naylor is the chief executive of the Mortgage and Finance Association ofAustralia .