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On January 1st new legislation for brokers comes into play – it is called Best Interest Duty.

So, how do you actually find a broker who will act in your best interests?

It is a sad comment on an industry of which I have been a part for 23 years, with multiple awards in that time, that a Royal Commission highlighted the need for legislation to compel brokers to do what should be integral to their ethos.

In general, people act out of self-interest and there is nothing wrong with that.

If I did not get paid, I would not be a broker.

The problem is not self-interest, but that when conflict arises between a client’s best interests and the broker’s, that a broker may act by putting their own needs above the clients.

It is of special interest that this legislation does NOT apply to banks – they do NOT have to act in your best interests!! (No surprises there though – we already know this.)

In my mind there is one major issue that affects home loan consumers and should be addressed, and it called – Differential Pricing of the Back Book.

Banks offer great rates to new customers and pay for that by ensuring that older loans get stuck with higher rates.

Because brokers are paid during the life of the loan* – there is a suspicion from the Royal Commissioner of a conflict here that brokers might just leave alone older loans that are sitting at a higher rate in order to continue being paid, and suggested instead that loans should be refinanced more often. What he has naively misconstrued here is that the issue is not the ‘churning’ of loans, nor commission as conflicted income, but rather the very wrong pricing system of banks that is the differential pricing of the back book.

This single issue drove Best Interest Duty legislation and so you would assume that it would be front and center in the legislation, wouldn’t you? – well, unfortunately you would be wrong…

Here is a summary

1 * Banks and brokers determine the value of a loan and pay it in two parts

  • Part upfront for the work done
  • Part ongoing to ensure that a broker looks after you and the loan

2 Differential pricing of the back book

  • New customers get new low rates and older customers are priced gouged.  
  • It is baked into bank pricing and underpins their entire profitability model – banks call it reasonable.
  • Ask a consumer if they think it is fair that new clients get a better price than older loyal ones – 100% say no – it’s a rip off.

3 The Royal Commissioner highlighted this obvious problem and questioned the integrity of brokers who leave clients with a bank long term (September 2019).

  • He spotted the issue and called trail commission conflicted income.
  • His naive logic flaw was that when a broker refinances, trail is continuous and another upfront is generated.
  • Programmed refinancing is in fact conflicted and is a blight on the industry.

4 ASIC reported on back book pricing to the Senate post RC (March 2020). Its findings were that;

  • The practice is legal
  • Consumers are foolish
  • Caveat emptor applies (Buyer Beware)

5 ACCC reports to the Government (December 2020).

  • That the practice costs consumers up to $50,000 over the life of a loan.
  • Banks should “urge” their customers to ask for a better deal.
  • I cannot believe the sheer naivety of this position – banks “urge” their customers to argue against their own questionable practices? – ha!

6 Best Interest Duty legislation commences (January 2021).

  • Brokers write 2/3 of all loans – so brokers could change this practice overnight by refusing to write a loan with a bank who will not reprice older loans back to new either automatically or when asked.
  • because most consumers know about this issue (back book pricing) and most consumers know they are being ripped off.

You will have heard my new ‘action statement’ by now –

That I will review EVERY loan, for EVERY client, EVERY 6 months.

This is where this was born from, my ethos to act in my client’s best interests and take my stand as a broker in addressing a problem and changing the industry one loan at a time.

The rest of the industry is merely focusing on making it easier to refinance – and completely avoiding the source of the problem.

Rather than simply addressing the ‘outcomes’ of this issue, I want to, and think the focus should be on eliminating the issue right at its source.

Please feel free to contact me directly if you would like to know more, or how this may impact you and your own circumstances.

Ask Alan