ASIC’s crackdown on mortgage broker shysters is aimed at attempting to mitigate the downside on any collapse in property prices when the cycle inevitably turns.
Provided unemployment is held in check that hopefully won’t happen any time soon, but as the recent ASIC litigation has shown, the scammers are already running wild, which raises the concerns.
Problems in home loans happen when people inflate their income levels, borrow too much and artificially inflate values. The $110 million scam alleged in the $1.3 trillion market this week is a sign of potential problems.
The Murray report has already recommended that self-managed super funds be banned from using debt, which if accepted would alleviate another scare -- the combination of home loan and property spruikers combining to fleece consumers.
This makes sense and, together with the ASIC crackdown, would help mitigate the fallout from the inevitable next crash.
In the middle of it all, of course, are the banks that lend the money and -- as this column has said before -- the real issue for bank regulation is more around big bank conduct not prudential standards.
Mortgage brokers are independent operators, but they are paid upfront commissions by the banks, which raises concerns.
The concerns are different from those in financial planning, where a crooked planner takes your life savings and then invests it badly.
The crooked broker generally lines you up with a mortgage you can’t afford -- which puts the bank in control of your finances.
There is a natural bias to push you into bigger mortgages and sometimes some consumers actively encourage the process by inflating their income or engaging in outright fraud. There is also a potential conflict in that the broker will push you to the bank that pays the broker the higher commission.
As in most consumer finance issues it all comes down to greed, often at both the consumer and broker level.
Mortgage brokers have long been on the ASIC hit list and provide yet one more example of what can go wrong in financial services when staff are rewarded by upfront commissions.
These send all the wrong signals and reward brokers based on new business, not on business quality.
This makes Sam ‘rent a quote’ Dastyari’s attacks on ASIC yesterday a touch perplexing.
ASIC is an easy can to kick, as Dastyari knows better than most, but at some point someone has to take responsibility for hiring shyster brokers -- and that it is not ASIC but the boss and the banks who grant the mortgages.
Surely Dastyari did not expect ASIC to tip off the boss just before making an arrest in the alleged mortgage broker home loan fraud case. In this matter that only happened last Friday and a public statement did not occur until Tuesday.
At that point, the boss should have known and in any case should have perhaps already been concerned if the allegations are true.
ASIC’s job is not to tell employers their staff have been arrested.
The industry is in the spotlight because home loans are one of the few credits showing any sign of growth and in this case it’s the system that has failed, not ASIC. The corporate cop is not always the sharpest tool in the shed but in the first half of last year, according to its most recent enforcement report, it has taken 18 people to task for alleged credit fraud, including two criminal cases and five enforceable undertakings.
Like financial planning, there should be a national register so employers know which staff members have run afoul of the law. ASIC does run a register of licensed operators but admits it could be more user-friendly.
National registers can breach personal privacy so must be treated with some caution but, at the end of the day, anyone running a financial services business must take ultimate responsibility for the firm’s reputation and that means hiring the right staff.
The boss in question, Cigna Financial’s Kent Leicester, was concerned he had not been contacted by ASIC to let him know it arrested one of his staff last Friday.
The real question for Leicester would be just what sort of people he is employing and what sort of due diligence he did before hiring accused broker Aizaz Hassan.
Since the National Credit Act was introduced in 2010 some 42 people have been banned, many on information provided by the big banks, which rightly are concerned about the quality of their mortgage books.
This article was first published in The Australian. Reproduced with permission.