A necessity in making sure that the industry as a whole is seen in a good light
Ethical broking is not only a necessity in making sure that the industry as a whole is seen in a good light, but also the way to maintain a healthy business. AB's Luke Cornish looks at what it means to be an ethical broker
In mid-March, news channels and newspaper around the world splashed the story of New York governor Eliot Spitzer ties to a ring of high-priced prostitutes. Having built his reputation for stamping out corruption and greed as the so-called "Sheriff of Wall Street", Spitzer endured a spectacular fall from grace, with his reputation as a man of high business ethics tarnished forever.
Spitzer's tale should remind anyone in business (indeed in life) that one's reputation can very quickly be turned to mud, if they don't act honourably in all their endeavours.
In mortgage broking, an industry where a few bad apples tarnish the reputations of many thousands, it is equally important that there be a high level of ethics practiced by its participants. As a professional service, broking depends solely upon its credibility with the public and if brokers do not adhere to high standards, consumers will lose confidence and the whole industry could collapse.
The evolution of ethics
From humble beginnings, mortgage broking has grown to represent some 40% of all housing loans. That growth has not gone unrecognised and there is now more pressure than ever for brokers to act appropriately. Kathy Cummings, head of third party banking at Commonwealth Bank, says there has been a shift due to the spotlight on ethical and professional practices.
"This has created a strong emphasis on broker training and appropriate business behaviours, while also driving the need for customer protection initiatives such as COSL (Credit Ombudsman)," she says. "Over the last 18 months mortgage stress has begun to highlight unethical practices in certain segments of the intermediary market."
Peter White, president of the FBAA, thinks that the growth in the broking industry, coupled with the emphasis on broker training, has led to a higher standard of service than in the past.
"I think the ethical standards of brokers are significantly higher now than they were in the late 80s and early 90s just because of how much the industry has grown," he says.
MFAA chief executive Phil Naylor says that his organisation has conducted surveys showing that public perception of brokers for the past few years has generally been positive.
"The public perception of brokers has always been fairly high," he says. "Some of the negative perceptions have come about from some of the consumer affairs programmes and some of those sensationalist programmes that highlight bad practices."
Naylor says that when you talk to individuals, though, their experience with mortgage brokers is a good one and they do not have concerns over the ethical behaviour of mortgage brokers.
Consumer-focused
Cummings says that it is important that brokers understand their client's point of view and feelings when recommending what products they should consider.
"I believe one of the most important things to remember is that we are dealing with customers who, in many cases, are making the biggest purchase of their life, which often involves their life savings or the commitment of most of their financial capacity," she says. "Given the magnitude of this decision, they need to be able to trust that the broker is placing them in the best possible product for their short and long term needs."
This means making sure that the borrower is not over committed with regards to repayments. This is particularly tricky when a borrower might claim to be able to afford more than they really can and it takes an ethical decision by the broker to speak up if they think the customer is biting off more than they can chew.
Naylor and White both agree that it is important that brokers act impartially and are able to recommend the best product for the customer regardless of the commission structure that might go along with that product.
"This is the oft made criticism by those outside the industry that brokers might be tempted to be influenced by commissions and so forth and therefore they are not necessarily acting in the consumer's best interest therefore they are not operating ethically," Naylor says.
Naylor says that the criticism has been well and truly shown to not be the case. White says that commission and incentives have to be put aside when recommending a product.
"The most important thing is to ensure that people are providing the right product for the consumer without being swayed by commission or incentive," he says. "It's a matter of finding out what is right for the consumer taking into account all the things they are looking for."
White says that it is sometimes hard to ascertain the pros and cons of each product but it is something that naturally develops with experience.
Legal vs. ethical
Cummings says that it is important that brokers recognise the difference between what is legal and what is ethical. Whereas the law sets the very minimum standards of behaviour to avoid state punishment, ethics set the bar higher and are used for instances where it would be impractical to legislate behaviour.
"Both customers and lenders rely on the broker to use their judgment in many situations [like] clarifying documents, fully explaining the best product for their respective financial needs and managing the client relationships and future needs," she says. "Importantly, it is also critical that the broker's staff, particularly other loan writers, are clear on the ethical standards required."
While ethical standards are generally higher than those set out by law, there has been a recent push to standardise regulation across the board. This is important to set the bar and will provide a platform to build on in future. This will allow for increased clarity by both industry participants and the public about what to expect when using a broker.
White says that the next step has to be licensing and legislation. He believes that it needs to include dialogue from industry participants to make sure it is practical and will help the mortgage broking industry.
"At the moment, it's being drafted from a theoretical point but it needs to be drafted from a business point and implementation point of view," the FBAA president says. "That is the next important thing and the sooner it gets written and the sooner regulators work with the industry the sooner we can have those standards raised."
Meanwhile, Naylor does not think that regulation in itself will provide a solution but it is a start. He says it is important for brokers to belong to industry organisations like the MFAA to make sure that a higher level of standards are achieved.
"I don't think licensing or regulation solves the problem itself, all it does is create a bottom line," he says. "What we're proposing is to take additional steps to ensure our members are higher than the minimum level."
He says the fact that the MFAA transparently and openly expels members that do not comply with its standards of behaviour and level of ethics show that the industry body takes the matter very seriously.
Education
If acting ethical broking requires acting in the best interest of the client, then it is imperative that a broker is up to date with all the products that are on offer. It could be argued that a broker who fails to recommend a product that they have not bothered getting to know it is almost as culpable as a broker that fails to recommend a product because the commission is minimal. In either event, the client is not getting the service to which they are entitled.
"For brokers to stay on top of ethical trends they need to get along to their association functions and take part," White says. "If you're just a mushroom sitting in the corner, you're not going to grow."
Getting together with others in the industry allows brokers to learn from each others mistakes and find out what new products are on the market. That will enable them to avoid pitfalls and provide the best possible service to their clients.
Cummings says that with the current liquidity tightening, ethical broking is even more of a priority.
"The current liquidity tightening is already placing pressure on segments of the intermediary market and the flight to quality has been occurring since August 2007," she says. "In this environment brokers who demonstrate strong ethical behaviour by looking after the genuine financial needs of their clients and who provide quality business to lenders will build the trust in both of the stakeholders in their business."
The fact remains that, while unethical behaviour by a mortgage broker may result in short term gain, long term sustainability and profitability relies on reputation and that can only be built by playing with a straight bat. When a broker acts unethically, they not only harm their own reputation but the reputation of the whole industry.
Potential pitfalls
- Verification of supporting documentation
- Undisclosed debts
- Correctly disclosing the number of dependants
- Gifts' that are actually non-declared borrowings
A question of timing
When a broker is unsure about the correct path to follow, the best option can be to ask someone that has more experience. Garry Dowd, Choice Aggregation Service's head of risk and compliance, said that a broker recently contacted him with a query on a loan he was doing.
The loan was for a new home for a professional couple. It had been approved but had not yet reached settlement. During that period, the man suddenly lost his job and told the broker to see if it would interfere with his ability to get the loan.
"The loan had been approved based on the capacity to repay, the people had jobs and the income supported that," Dowd said. "By advising the lender it was possible that the settlement could be called off, the loan approval withdrawn, and the client would have to possibly lose their deposit and possibly incur settlement delays and fees."
None of these outcomes would be beneficial to his client, who he was representing under the broking agreement. Unsure of whether he was required to inform the lender, the broker contacted Dowd to find out what the ethical thing to do was.
"My advice was that the only right thing was to inform the lender," he said. "When you become aware of information that affects the lender, you're under an obligation to tell them."
He said that the lender may make an exception and allow the loan to go through because if the man had lost his job a couple of weeks later, it would have been in the same boat. However, the choice is up to the lender and the broker has to remember that he is a servant to two masters.
