With the first round of hearings at the Royal Commission (RC) now over, we were able to get a good grip of the approach the RC is taking in its investigation into misconduct within the financial services sector.
At face value, whilst there is no doubt limited time to investigate such an industry that would require years to thoroughly investigate, it appears the RC is squarely focused on misconduct within the retail banking sector. The retail banking sector is the sector where individual consumers primarily use bank services. Thus in the early hearings of the RC, the primary focus was on mortgage lending and to a lesser extent, car financing and consumer credit (i.e credit cards).
To best summarize the approach, relative to the calibre of public submissions submitted to the RC, an unusual but expected approach was taken. As our forensic research has consistently indicated, our financial regulators, particularly ASIC (at an individual level) do not investigate allegations of mortgage fraud when an individual borrower approaches the regulator to lay claims of misconduct against its lender. However when a lender is too a victim of misconduct, and the lender approaches ASIC in relation to employee or third-party misconduct, ASIC investigates the matter, takes action, and enforces the law. The RC appeared to focus more on instances from the latter rather than the former and the RC used the very few of those examples that exist as the case studies.
From what we have observed over the last two weeks, it is quite clear that the RC will limit the public eye from scrutiny over serious internal misconducts internally within banks mortgage divisions and rather hone in on the relationships between mortgage brokers and lenders– and how the relationship between these two industries sometimes fails to meet community expectations or create undue legal breaches. If the RC has essentially closed its chapter on mortgage lending to focus on other aspects of misconduct in the financial services industry at a retail level, lenders would most definitely be breathing a fair sigh of relief as the surface was only scratched rather than the RC conducting a more thorough deep dive into misconducts in the mortgage market. At this time, we are simply unable to speculate what approach the RC is taking behind the scenes outside the scope of the case studies used in the hearings.
Whilst in the public eye, instances of brokers fudging financial circumstances of potential borrowers, or gym instructors making introductory referrals to lenders may seem wrong, or falling below community standards, there is little new to see here.
The only key finding (which LF Economics has long argued) which may have not been interpreted in the public domain as bad as it could have was ANZ admitting it does not verify mortgage applications submitted by mortgage brokers alongside broad industry-wide use of lenders using poverty level living costs as a benchmark to assess whether a borrower will be able to repay their loan in full and in-line with the National Credit Consumer Protection Act of 2009. Mortgage underwriting standards in Australia are indeed beyond poor.
Nevertheless, the questionable actions taken by financial institutions, as observed in the RC case studies, it does open the door eventually to legal recourse. Furthermore, it is highly likely that the RC will have to make stringent recommendations for lenders to significantly improve their loan approval, underwriting and verification processes. As we have previously argued, improving loan verifications processes, such as calling the borrower to confirm their financial circumstance, and implementing adequate coding algorithms into a lenders loan serviceability calculators to calculate more realistic serviceability measurements, will be a costly exercise from both an implementation and revenue generation perspective. This will only make it harder for lenders to increase the size of their mortgage books and get more loans across the line.
In summary, whilst our forensic research has identified much more serious systemic issues of misconduct at hand that lay within the mortgage market, only time will tell whether the RC will cover these more meaningful issues of misconduct.