Building the right regulatory framework

A person who seeks advice on investment products needs to go to a licensed adviser.

However, if the same person wants advice on a mortgage product, they can see virtually anybody, except in Western Australia, where there is a licensing regime.

Reverse mortgages have also been caught up in this situation. Financial planners can sell reverse mortgage products without any licences.

The exception to this rule is, again, Western Australia, where a planner needs a licence under the Finance Brokers Control Act (WA) of 1975.

After meeting various educational standards and professional indemnity limits ($1 million), a licence will be issued by the WA Government.

The situation of one state operating under one set of rules and the rest of Australia being unlicensed has led the Federal Government to look at introducing a national set of rules for mortgage broking.

There are two basic sets of proposals being promoted by interested parties.

One school of thought is to make the WA model national, which would mean financial planners would have to seek a new licence to handle products such as reverse mortgages. For mortgage brokers, this model is the easiest solution.

Alternatively, mortgage broking could be a bolted-on component of the Financial Services Reform (FSR) licence. This model is favoured by the financial planning industry, while mortgage brokers are not keen, as they will need to obtain a much more complex licence.

Arguments for both cases have been put to the Federal Government, with no announcement yet on what will happen in the future.

Meanwhile, financial planners continue to sell reverse mortgages, although there is a general consensus that there has to be some form of licensing regime in the future.

Over Fifty Group managing director Chris Martin believes the decision has to be made for a uniform licensing regime.

“I think everybody agrees that some form of licensing is a good idea,” he said.

“How it is done is the question.”

Macquarie Mortgages division director Tim Brown believes the lack of national regulation causes problems.

“It is a bone of contention with both sides (financial planners and mortgage brokers), and it is a concern that people are selling without accreditation,” he said.

Mortgage Industry Association of Australia (MIAA) head of education Kevin Conlon said with a lot of people being encouraged to become involved in reverse mortgages, there will be some jockeying between planners and brokers for roles in the sector.

“We have got to get planners working with brokers in the best interest of clients,” he said.

“The broker is an end product provider, but there is a need for some information to support them.”

Conlon said there is an argument that selling reverse mortgages through a broker is more effective, and their growth in market share, from 17 per cent to 43 per cent in 18 months, confirms this.

With this strong market position, MIAA has worked on creating training courses to sell reverse mortgages.

The association has introduced an equity release course, which provides on overview on the product range, customer base, regulatory framework and key transaction issues.

The objectives of the course are to give the broker or planner a better understanding of the operation of reverse mortgages, how to identify customers who may benefit from these products and how to manage the expectations clients have of such products.

The course has been approved by the SeniorAustralian Equity ReleaseAssociation of Lenders (Sequal), the reverse mortgage watchdog, as it meets the organisation’s education standards.

“The MIAA realised that when a member is dealing with a reverse mortgage product they had to be trained,” he said.

“Since offering the course, there has been strong take-up, and not only from brokers, as people clearly require knowledge of these products.”

The accreditation by MIAA has been taken up by providers such as Macquarie and Over Fifties.

Brown said to sell its reverse mortgage products the broker or planner needs the MIAA accreditation.

“You don’t have to be a financial planner to sell our reverse mortgage products, but you do have to be a MIAA member, which is part of our requirement,” he said.

“Approval for the sale of a product is not given without financial advice, so the client is getting independent advice.

“If not managed properly, you could get some people giving the wrong advice.”

Conlon said while reverse mortgage products are not complex, it is important financial and emotional issues are considered.

Because of these issues, he said face-to-face selling of these products works much better than telephone transactions.

“It is a relationship that is developed face-to-face when talking to clients about these products,” he said.

“The broker and planners must have regard for the decision-making process of the client, and that may involve the children and other family members.

“The tricky part is to properly understand the client considerations and consider the outcome of using these products.”

The typical client using a reverse mortgage has come from a historical background of paying off the debt in the family home.

Now they are being told to do the reverse, which is to accumulate debt in the family home.

This is why some people are arguing financial planners should be involved, to present a complete picture of how the debt will sit with other parts of the investment portfolio and superannuation.

Conlon says, historically, financial planning advice was about everything other than the family home.

“People were not comfortable talking about the home as an asset,” he said.

“But clients are being helped to make informed decisions about using the home as an asset, and this involves both mortgage brokers and financial planners focusing on the needs of the client.”

Conlon said he is encouraged by some dealer group involvement in reverse mortgages.

“Reverse mortgage products will be part of a solution for some clients, but not for everyone,” he said.

“The home will have to be a part of wealth creation, which means reverse mortgages will be part of creating a good outcome for some clients.”

What Australia is keen to avoid is the mistakes made in the UK during the early 90s, when an unregulated market saw numerous abuses of trust by brokers.

Conlon said the financial services authorities in Australia believe the handling of the reverse mortgage product is done in an orderly manner.

“This is some testimony to the mistakes made overseas in the UK, and Australia has benefited from these,” he said.

“The Australian market is better placed than the UK market in the 90s.”

However, the argument over who will be the licensing authority continues.

Martin sees a risk in the Federal Government plumping for the WA model of licensing as the national benchmark.

“That is a fundamentally flawed solution,” he said.

“We encourage recipients to get financial planning advice, but if we follow the WA model it will remove licensed financial planners from the market.

“This would be a socially wrong outcome.”

The introduction of a new licensing model is still some time away, as Australians will go to the polls later this year.

Governments do not like making unpopular decisions in election years, and whichever licensing model they choose for reverse mortgages is going to offend somebody.

Selecting the FSR route could see states such as Queensland and WA rebelling, as well as many mortgage brokers up in arms. Queensland has a number of marginal Liberal seats and the Government is unlikely to want to upset voters there.

Selecting the WA model could upset financial planners and a number of product providers, but this might be a less risky choice when it comes to votes. Certainly, the Labor-controlled states would favour this choice, especially in WA where nothing would change.

So it looks like the licensing debate will continue while the industry actually implements some good self-regulating moves without the assistance of government.