The major cultural issue is the AllFInanz model under which banks combine banking, insurance and financial services. All of these activities have different risk profiles and attitudes, and they don’t belong together.
The aim of banking is to lend money, and never have to foreclose. Foreclosure is seen as a failure by the lending officers. Banks make a small amount of money on each loan compared to what is outstanding, and they need to be able to return interest and principal to the depositor at some stage.
Insurance is the business of pooling risk. You don’t assess the customer’s ability to pay as that is irrelevant as long as they make the premiums. If they don’t pay, then the contract is ended, or never starts. And there is a certainty that the insurer will pay out at some stage on some proportion of their portfolio. It also has a more aggressive sales culture: a large proportion of insurance has always been driven by salespeople, often going door-to-door.
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And then there is stockbroking and other wealth management services. Again, the attitude to risk is different, but quite dissimilar to that of a banker.
So, in my view, the commissioner should have recommended untying the AllFInanz structure, which is a product of only the last 20 or so years, although this would have been a stretch on his terms of reference, because that is where the real cultural conflicts are likely to be occurring.
This could have been done by recommending that the federal government withdraw its guarantee of deposits under $200,000 for any institution that combines lending with other financial services. That would force them to choose between being AllFinanz whales, or mere deposit-taking and lending elephants, and put the depositor on notice of higher risk inherent in the aggregated model.
Basic lending ought to be a boring, moderately well-paid, business, run by people who want to sleep well at night. Home and business lending should not be mixed-up with merchant banking and other investing and capital raising activities.
Finance broking also fits under Haynes cultural issues, but here he has a number of misconceptions. I was a finance broker 35 years ago, when the industry was in its infancy, and when fees had to be charged to borrowers for mortgages, but when we could get a fee from the lender for lease finance. That meant you arranged a lot of lease finance, but not much mortgage finance, even though the benefits were the same for the borrower in each area. The difference was the psychological pain in paying up front.
Brokers provide a valuable service. Borrowers can, as Alan Kohler argues today, go direct to a lender, and there are plenty of vanilla borrowers who do just that. Which means that the 40% that go to brokers are likely to have more complex requirements.
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Multi-millionaire journalists may think that all lenders are basically the same, but they aren’t. There are wrinkles in their lending practices, as well as their appetite for risk in particular areas. If you are in the market every day organising loans, then you understand these wrinkles which can be worth quite a bit to a borrower, particularly if it means the difference between getting a loan and not getting one.
When I was broking we used to dream that the industry would be like the general insurance industry, where insurance brokers, some of them very large corporations, were paid directly by the insurers, and the insured couldn’t get it more cheaply by going direct. In fact, many insurance brokers got better rates for their clients than the clients could themselves because of volume or underwriting arrangements.
I haven’t heard any complaints about conflicts of interest in the general insurance market. Anyone who uses an insurance broker realises the broker is selling a product, and just as there is competition between lenders there is also competition between brokers. Conflict of interest exists in just about every commercial relationship, but you can’t manage it by trying to abolish it, because it can’t be abolished and will literally always be there in some form or another.