Mortgages are financial products and need advice

30 August 2017

At the same time as the mortgage broking industry has established a forum to deal with remuneration issues, a key actuarial consultancy has argued that mortgage brokers should be subject to much the same requirements as financial planners including ‘know your clients’ and a ban on commissions.

The consultancy also wants mortgages deemed as financial products in terms of the Corporations Act.

The Minister for Revenue and Financial Services, Kelly O’Dwyer welcomed the mortgage industry’s creation of a forum to develop an industry led response to the Australian Securities and Investments Commission’s (ASIC’s) review of mortgage broker remuneration but pointed to the Treasury’s review process of the situation.

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As part of that Treasury review process, actuarial consultancy, Rice Warner filed a submission in which it argued that there was a need inject a need for “appropriate advice” into the equation in circumstances where mortgages could not be deemed “simplistic consumer products”

“In conjunction with their collateral asset, mortgages are equivalent to other long-term investments and require equivalent advice especially in relation to long term risks,” it said. “Mortgages are not simple consumer credit products.”

“We believe that the lack of formal ‘know your client’ obligations that properly recognise the long-term nature of mortgages is a deficiency that should be remedied. Mortgages are long-term financial commitments that impact on all other long term financial plans and need to be recognised as such.”

The Rice Warner submission said advice regarding the type, structure and term of a mortgage needed to recognise the other long term financial commitments and aspirations.

“This is especially the case where the mortgage is used to provide gearing for further investment. To do otherwise would be a failure to serve clients’ best interests,” the submission said. “We consider that consumers’ interests would be best served by reclassifying mortgages as financial products in terms of the Corporations Act. This would immediately and definitively address the issues related to the levels of remuneration and the conflicts of remuneration. “

The submission argued that such a move would also address the quality of advice, the qualifications of brokers, the oversight and disclosure regime, and the need to act in consumers’ best interests.

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Have we got yet another consultant poking their head out of the ether to espouse critique on an industry which they have a fundamental lack of understanding? Mortgages are credit products, provided after an in-depth (and often client invasive) process in order to ensure that the short, medium and long term needs are met. They are provided under an authorisation and/or licence, under legislation and regulation which deem there to be a 'no-advice' process.
Contrary to financial advice, almost all mortgage products are 'bought' rather than 'sold'. Ask any financial planner when the last time they were swamped with requests to have life insurance purchased.
Rice Warner, I ask you, who is paying your bills?

I could've written that comment myself. Credit products are already heavily regulated. Don't believe me? Try and get a Credit Licence!! Commissions paid on mortgage sales are reward for broker who wades through the market to help find the right product for their client. Want people to stop using brokers to find the right mortgage? Just eliminate commissions. Wrong headed of RW to make these points with no actual evidence (to my knowledge) of a problem under the existing (regulated) space.

In one sense I agree with the sentiments being expressed by Rice Warner but making a mortgage a financial product would have consequences - the most obvious being that clients would have to be provided with SOA - I suspect that the costs and delay associated with producing a SOA would make the mortgage broking industry uneconomic.


The #InternationalMonetaryFund can see the systemic risks. They have a global view of Housing Finance and Real-Estate Booms: A Cross-Country Perspective, see here: think that the IMF would agree with: "The Rice Warner submission said advice regarding the type, structure and term of a mortgage needed to recognize the other long term financial commitments and aspirations" This is why:
The IMF have issued an alert by way of a blog post about using #Fintechto manage risk better Globally, this is the main risk that they would be aiming this blog post at in my opinion: .
This is a robust global public debate that needs to be conducted because it is about whether lenders owe a duty of care to borrowers about interest rate risk management AND THE BORROWER'S PERSONAL BUDGET. This debate should also extend to mortgage insurance as to whether optional additional mortgage insurance to cover the difference between proceeds of a mortgagee's auction and the lenders valuation should be part of a loan's structure i.e. Principal, interest, fees, personal insurance and customers mortgage insurance to cover mortgagee's sale proceeds gap. Currently, people are being bankrupted over this issue.
Fintech can clearly manage the interest rate risk better and the International Monetary Fund would see this, see here:
In 2015 Eugenio Cerutti, Jihad Dagher and Giovanni Dell’Ariccia published an IMF Staff Discussion Note entitled Housing Finance and Real-Estate Booms: A Cross-Country Perspective. Their reference for the report is SDN/15/12. This is a valuable resource for The Regulators because it looks at the issue of interest rates and housing finance globally. Of particular interest for The Regulators is the authors’ comment:
“Interest Type: Mortgage rates can be fixed through the life of a loan, or vary over time with changes linked to key interest rates in the economy. In our sample, the standard mortgage rate is variable in 30 countries, fixed in 12 countries; while in the remaining 14 countries both contracts are observed. Variable rates are more common in emerging economies.”
Our country is not the only one that needs to have this debate to better protect customers. It is clearly a systemic risk that needs discussing and addressing. It is a bi-partisan global issue.

If mortgage brokers don't want the biggest purchase/investment in a person life not be called a financial product then they should stop people ringing me up all hours trying to sell me the purchase of an investment property funded by a loan. Why is it that they can breach the anti hawking legislation and flog a loan ?? Bring it on I say and turn it into a financial product to provide consumer protections. Commission paid to mortgage brokers like financial planners according to Union Super funds have the ability to distort the relationship. I would maybe say the mortgage broking industry should be involved in self regulation quick smart.

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