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With open banking already established in the UK, and several other key differences between the two markets, Australian Broker talks to uno Homeloans’ Anthony Justice and PLAN Australia’s Anja Pannek to find out what lessons the industry can learn from its friends across the sea
After more than three years of Brexit talks, deals and political wrangling, the UK officially left the European Union on 31 January – a move that will no doubt have a long-lasting impact on its economy, financial services, property and lending market.
But alongside Brexit, financial services in the UK have experienced many other significant changes over the last few years, including the start of an open banking regime back in 2018.
Given that there are a number of similarities between the mortgage broking industries in Australia and the UK, there are potentially some lessons to be learnt from that market about what to expect here.
Indeed, according to Anja Pannek, CEO of PLAN Australia, the core product offerings of both mortgage markets are quite similar. She says, “First-time buyers, home movers, refinancing and buy-to-let are all segments that mirror the different types of borrowers we have in Australia.”
Pannek adds that “UK brokers have a higher market share at approximately 70% plus, compared to around 60% in Australia, and so we often look to the UK as a lead indicator of where our market in Australia will go in due course.”
Anja Pannek, CEO, PLAN Australia
The UK mortgage market
While Australia managed to come through the GFC relatively unscathed, the UK was hit hard, and tighter lending standards for the home loan market were subsequently introduced, Pannek explains. This resulted in greater regulatory oversight of the broker channel.
“In the aftermath of the crisis, the UK embarked on a regulatory review of remuneration structures in the financial services sector, including mortgages. A review of the home loan market – known as the MMR – was conducted in 2014 and again in 2019 to see what impact the reforms had.”
The review led to several reforms, but a ban on commissions was not one of them. In April 2014, new responsible lending rules were introduced by the UK Financial Conduct Authority, including requirements for the lender to assess the affordability of a loan and to stress-test it for expected future interest rate rises.
The review led to several reforms, but a ban on commissions was not one of them. In April 2014, new responsible lending rules were introduced by the UK Financial Conduct Authority, including requirements for the lender to assess the affordability of a loan and to stress-test it for expected future interest rate rises.
“UK brokers are obliged to outline all fees in an initial disclosure document and carry out the vast majority of legwork traditionally done by a lender, from affordability checks to regulatory and compliance checks.”
Since these changes, she explains that both lenders and brokers must now consider a customer’s financial situation and assess their ability to afford the loan when suggesting a suitable mortgage. UK brokers and lenders must also be able to provide evidence that this has occurred.
In Australia, however, responsible lending operates under a ‘not unsuitable’ test; from 1 July 2020, the industry will see the introduction of a best interests duty for brokers only – not lenders.
Pannek adds, “In Australia, I expect the best interest duty to result in greater articulation and documentation by brokers on why the product recommended is in the best interests of their customer.”
UK and Australia: Key differences
Regulations covering mortgages in the UK and Australia are fairly similar, with mortgage brokers required to provide borrowers with key facts that compare different loan products in terms of interest rates, fees, etc – but there are some notable variations.
According to Pannek, one significant difference between the two markets is the prevalence of short-term fixed rate home loans in the UK market.
She says, “These products account for the majority of loans, as opposed to variable rate home loans, which are the overwhelming preference in Australia.”
And unlike in Australia, UK mortgage brokers do not receive trail commissions.
“Some lenders do remunerate brokers for advising customers to stay in a product rather than refinance at the end of the fixed rate term,” Pannek says.
“That said, it should be noted that brokers in the UK are required to reassess the suitability of the loan before making a recommendation to the client.”
Anthony Justice, CEO, uno Home Loans
She also points out that ASIC made reference to the UK market in its 2017 Review of Mortgage Broker Remuneration, which noted that the lack of trail commissions had been seen by some as a potential driver of churn in the UK home loan market, where many consumers were in shortterm (often two-year) fixed rate home loans.
Indeed, according to Anthony Justice, CEO at uno Home Loans, who has held management and operations roles at UK-based brokerage Halifax Investment Services, the key difference between the two markets is that in the UK a high proportion of customers are on fixed rate deals, while in Australia the vast majority of borrowers are on variable rates, at around 90%.
He explains, “That means that in the UK there is a natural point at which consumers refinance to avoid the payment shock of reverting to the standard variable rate.”
Justice suggests that this means UK brokers are faced with two choices: they can move the customer to a new lender, often starting a new fixed rate period – typically two, three or five years – or move them to a new product with the existing lender.
He continues, “Brokers get paid for both – a bit more for moving to a new lender, but the important point is that the lenders see retention as very important and are prepared to pay brokers to place the customer in a new product with them as the existing lender.”
But in Australia, where most borrowers are on a variable rate, there is no natural point at which it is necessary to consider your options. Justice says that, over time, it is likely that a consumer’s loan becomes a lot less competitive “as new rates appear in the market that favour new borrowers over existing ones; equity in the property increases, meaning access to better rates is available or LMI is no longer necessary; or circumstances change – income goes up, for example”.
And while the British government does not have a grant for first home buyers like Australia does, it has schemes such as the Help to Buy program in which it provides loans of up to 20% of the property’s value interest free for five years.
Pannek explains, “The British government offers assistance to first home buyers in the form of the Help to Buy scheme, which features several formats. For example, the Shared Ownership scheme offers first home buyers the chance to buy a share of their home – between 25% and 75% of the property’s value – and to pay rent on the remaining share. Down the track, the first home buyer can purchase a greater share when they can afford to.
“Another interesting option is the Equity Loan, where the government lends first home buyers up to 20% of the cost of their newly built home so they will only need a 5% cash deposit and a 75% mortgage. First home buyers aren’t charged loan fees on the government loan for the first five years of owning the property.”
Meanwhile, in Australia, the federal and state governments have introduced several different schemes over the years in an effort to improve home affordability.
The latest effort by the Morrison government is the First Home Loan Deposit Scheme that came into effect on 1 January 2020, which aims to support up to 10,000 new homeowners each year in purchasing a home with a deposit of as little as 5%.
The takeaways
According to Justice, consumers can often get a better rate than the one they are on, even after the costs associated with switching. But because there is no natural point at which to evaluate this in Australia, as there is in the UK, clients often go for five years or longer without refinancing or even trying to get a better deal with their lender.
Justice says, “When customers do come to refinance [in Australia], brokers are remunerated with a new upfront commission – typically 65bps – for moving the customer to a new lender. If the customer stays with the existing lender, there is no remuneration other than the existing trail commission.”
This is something that will likely see changes following the adoption of the best interests duty reforms.
In fact, Pannek says one of the key learnings from the UK market is that Australia’s regulatory efforts should be examined, specifically in terms of introducing regular mortgage market reviews.
“We should expect more reviews in Australia, and locally the next mortgage industry review is coming up in 2021. Staying focused on good customer outcomes is critical, and these reviews enable us all to reflect on how we can continue to drive the best possible outcomes for borrowers,” she says.
“The introduction of a best interests duty is likely to be a game changer for our industry. Borrowers will be able to go to a broker and know they are bound by law to act in their best interests – a change we believe will help to build even greater trust in our industry.”
She adds, “The bottom line is that the broker market share has only gone from strength to strength in Australia since the great financial crisis, and I believe our market will continue to evolve positively.”
Finally, Pannek suggests that Australians are traditionally fast adopters of new technology, and so open banking could have a much more transformational impact on provision and access to financial services for Australians, compared to what it has achieved in the UK.
She says, “Open banking will drive innovation in financial services as fintechs and banks come together to overcome the challenges of legacy systems and address customer needs and the customer experience.
“There will also be innovation in the broker channel that will see mortgage professionals better equipped to help their clients, particularly when it comes to the sharing of data that traditionally has been very clunky to share, to ensure customers benefit from the best possible outcome.”
Agreeing, Justice adds, “We are starting to see much more innovation in the financial services sector, and that’s starting to occur here, too, in anticipation of open banking.
“I believe we will see increased transparency and easier access to digital experiences that allow consumers better choice and transparency. We will also see more innovation and disruption in favour of the customer.”
