If you looked carefully, the writing was on the wall last December. Shortly after Commissioner Kenneth Hayne was appointed to lead the banking royal commission, the final terms of reference was expanded by a single, yet crucial, sentence.
It took Commissioner Hayne just two weeks to realise the draft terms did not explicitly capture mortgage brokers. He pressed the government to expand on its definition of a financial services entity to include persons or entities “acting as an intermediary between borrowers and lenders”.
It was a small but important change.
Mortgages are the beating hearts at the centre of our banks. There is $1.8 trillion in outstanding mortgages and brokers are responsible for originating every second loan that is written. In 2015 mortgage brokers captured almost $2.5 billion in trailing and upfront commissions.
The mortgage broking wave has been ridden by a number of larger-than-life characters including Wizard Home Loans founder Mark Bouris (estimated wealth of $200 million) and the founder of Aussie Home Loans John Symond (estimated wealth of $624 million).
Bouris, who now runs mortgage and wealth business Yellow Brick Road, gave an unintentionally candid view into the world of compliance among brokers when he told Commissioner Hayne his response was incomplete “owing to the interruptions caused by the festive season”.
Symond’s former mortgage business is the biggest in Australia. It was an enormous success story and had made him a very wealthy man. However Aussie has also been a hotbed of poor behaviour in recent years, with its 15-page submission containing some shocking accounts of misconduct.
As recently as last January, three employees of Aussie broke into a dis-used Aussie store after a work event, stole items and were involved in an assault. One was fired, the other two merely disciplined.
For a long time, the financial advice arms of the banks had been viewed as the sector’s problem child. But as the royal commission revealed, the grubby antics of a few hundred dodgy financial planners was nothing compared to what was going on in the bank’s true profit centres.
In submissions to requests from the royal commission last year and published on Wednesday for the first time it has become clear that the mechanisms responsible for funnelling hundreds of billions in mortgages to the banks each year have become ground zero for misconduct.
During the first round of hearings into consumer credit back in March observers were shocked to hear the extent of the rot. Fraud, forgery, overcharging and privacy breaches abounded. Bonus schemes appeared to be routinely rorted.
The latest cache of published documents, however, reveals disturbing new evidence of misconduct making mortgage broking looking like the wild west of financial services. Bribery, identify theft, property theft, assault, sexual harassment, public intoxication, financing of drug dealers, impersonation of customers and more.
There is also thousands of instances of what might generously be called sloppy paperwork in the submissions. Missing files, lack of documentation – the kinds of inconsistencies and behaviour that sees brokers produce unbelievably low expenditure estimates for loan applicants (and subsequently originate bigger loans and larger commissions for the brokers).
The firms that offered up only 10 or 20 examples of misconduct in their submissions may have had more to say if their commitment to record keeping wasn’t so lacking.
Loanmarket is a broker owned by the Ray White Group and has more than 1000 brokers. It lists just 33 incidents of misconduct by its brokers. Many of these are garden variety “paperwork anomalies” described above. But some are not.
In March 2013, Loanmarket became aware of a broker who was involved in the financing of drug-related activities. Police became aware of the broker through criminal investigation. Loanmarket doesn’t explain what happened other than to say that by the time police contacted the business the broker had left and was acting in her capacity as a broker elsewhere.
In June 2016, a different broker was pulled up for advertising student loans on WeChat, a popular Chinese social media platform, in breach of the credit code. The broker was investigated and found to have forged signatures on more than one occasion. Loanmarket said the broker’s actions were “unacceptable”.
In October 2013, Loanmarket details an instance of a broker using a “fake approval letters” to confirm loans had been approved when they had not. The broker in question said he was being threatened and harassed. Disturbingly, this does not seem to be an isolated occurrence.
Australian Finance Group, a $300 million listed company, says it observed nine instances of fake approval letters between 2011 and 2019. It observed “the conduct may arise in instances where client pressure is applied” and when consumers are operating “within a time-critical buy and sell circumstance”. The idea that an employee might respond to pressure by resorting to forgery is not a concept you hear often.
As it stands the minimum education level for a mortgage broker is a Certificate IV Finance and Mortgage Broking. The course can be completed in 26 weeks at some institutions.
But the level of misconduct revealed raises plenty of questions about some brokers’ commitment to professionalism and self improvement.
Take the Aussie Home Loans broker who submitted their own loan documents in March 2016 and attempted to collect the upfront and trailing commissions on the loan. He was found out after it was revealed his application contained a number of anomalies, including missing dependents and liabilities.
Closer to Christmas that same year, another Aussie broker used the firm’s IT systems to send emails containing material “which could cause offence to a reasonable adult”. Twice. Or the broker who made homophobic comments to customers at a ‘Caravan and Camping Expo’. Or the employee who sought to obtain a duplicate receipt from a work function to “create a false tax position”.
Aussie Home Loans was a hotbed of misconduct. The Commonwealth Bank, which bought the business from Symond for roughly 3 million shares worth over $200 million in a number of tranches, is now looking to offload the business as part of its broader wealth exit.
And no wonder. Consider these episodes.
In February 2014 one of Aussie’s retail store brokers allegedly abused a woman in a car park with the incident then recounted via social media. The franchisee was terminated. The following month an Aussie broker sexually harassed another broker outside the workplace. The broker was provided with training and their conduct monitored.
In February 2016 a broker impersonated another customer in order to arrange a valuation. They were issued with a breach notice. In August the same year an Aussie broker left an intimidating voice message on a counterparties voicemail. The phone message included offensive and foul language. Two months later a broker threatened a customer’s solicitor.
In January 2017 an Aussie employee used the personal information of another broker to take out a credit card in their name. They were dismissed. The next month Aussie employee made inappropriate comments and used sexual language in conversation with another employee. The employee was dismissed.
In many of these instances Aussie would refund customers for thier losses. Where there were no losses, they would offer customers “gift cards” in an attempt to make peace. Aussie considers these cases closed.
Commissioner Hayne however will have more to say on the subject of brokers, the root causes of thier misconduct and how to prevent it from happening again when his final report is published on February 1.
Among the questions he will answer is whether the $2.5 billion in commissions paid to brokers each year in the best interests of bank customers and if they are not, are they in breach of Section 912A of the Corporations Act? Should he find they are not in the best interests of the customer, and they are in breach of the law, then both the banks and the brokers will need a plan b. Pronto, as Hayne would say.