What you need to know about the changes to banks and brokers

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Skyscrapers of different banks in the city.

One year ago, the Banking Royal Commission finished its investigation, but has the financing sector picked up their game? So, has these changes been implemented to banks? In this article, we’ll review the proposed changes to banks and brokers, and what it means for you.

Indeed, the Royal Commission showed that without sufficient checks and balances, corporations can exploit customers for profit. Also, with friends in the right places, these businesses will get away without paying for their actions. This is why the following the commission came out with the following recommendations:

  • Increased open banking – tools for sharing your banking data with third parties (approved by the ACCC) to help you search for better deals. Think of it as a way of finding out if you could be paying less for the same savings or credit account, or home loan.
  • Relaxed responsible lending laws – it will now be easier to access credit even with a bad spending history, making home loans more accessible to more people. This has come under scrutiny, as the relaxed laws could increase the average Australian’s household debt.
  • Best interests duty reforms for mortgage brokers – best interests duty means it is the brokers’ obligations to put the customer’s best interests first. ASIC will implement this from 1 January 2021.

All of these changes are to give customers more control over their finances with a better understanding of the services available.

Increased spending isn’t a good thing

The axing of responsible lending laws should help to stimulate the economy. However, this reform may hurt more customers than it helps. Banks and other lenders have to take certain steps to ensure that a borrower is able to repay their loan before they approve these loans. The proposed changes to the laws cuts back on that approval process and instead increases “borrower responsibility”.

Allowing more Australians to take out mortgages will increase spending, but that’s not necessarily a good thing. While it may give customers more negotiating power with the banks, these changes remove a safeguard there to stop Australians from falling into greater debt. Now, as we continue to live through an economic recession, is the worst time to increase our household debt. What’s the point of “stimulating the economy” if it comes at the cost of our livelihoods?

Brokers need to have your interests at heart

Best interests duty means brokers will be more accountable to treating you right. Sometimes, brokers get a higher commission from certain banks, or are dependent on their sales commission for a sufficient income. This creates a conflict of interest and they may be exploiting you for higher profit.

ASIC will hold brokers accountable to best interests duty in a few ways. Brokers found serving their own interests over yours can be fined up to 1 million. There is also a new conflict priority rule, which states that when a conflict of interest emerges between the customer and broker, the broker must resolve it in the customer’s favour. If this is not possible, the broker must not proceed with the customer.

These changes are taking place in the form of better “high-level principles” rather than stronger business practice rules and regulations. Unfortunately, this means it is still up to the brokers to do better. ASIC will need to enforce these principles strongly to prevent brokers acting with a conflict of interest.

What you need to know about the changes to banks and brokers

Open banking is worth checking out as it is implemented across banks and lenders. If you don’t trust a mortgage broker to do it for you, this is one way you can understand financial products and services better.

Don’t get carried away by the relaxed lending laws. We are still in an economic recession, and increased spending is likely to land you in deeper debt.

Brokers should not be ripping you off, best interests duty or not. It’s always worth knowing your interest rate and checking out the best rate on the market for yourself. If your mortgage is 2-3 years old or more, then you can probably get a cheaper deal. If your broker doesn’t want you to switch home loans, ask them why. Ring your bank or broker for a better deal, or shop around yourself.

It is good to see that the Australian government is beginning to look at how the financing sector can treat people better. However, we still have a long way to go before the opportunity to hurt customers for a higher profit is eliminated from the industry.

Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.