Jun 032008

Those who read here even semi-regularly will know that I’m an inhabitant of the finance industry.

I’ve been a banker, I’ve been a broker and I’ve been a lender. In my current incarnation, I’m a hybrid of all three. A challenging role, to be sure, but not one that’s at all unfamiliar. The benefits, thus far at least, have been the interactions with like-minded people from broker to client to funder. That’s the fun side of finance, for me at least. I find that most brokers in the game know their stuff, know their products and have a good grasp of credit basics. Sadly, there are also those who know just enough to be a danger to themselves, as well as their clients.

I have one broker who’ll put in a deal, then whinge because it doesn’t meet his expectations for approval because…..well…..it just doesn’t meet credit policies of the lenders. Not my problem, but it’s made out to be mine because I couldn’t get his pack-a-poo ticket across the line. If I had been able to lie, cheat and steal, who’d have benefited? He would, of course. Commission, people. It’s how finance brokers live. From week-to-week, deal-to-deal. Some are quite adept are sourcing the best quality business and presenting it in the most complete manner, enabling the analyst and the funder to easily and succinctly evaluate the risk, accept it, and approve the funding. Then there’s people like my ol’ mate, Doug, who clearly don’t have a clue about prudentiality or submission protocols, let alone reality. He’ll source the less-than-top-shelf deals, then speculate, agitate, frustrate, masturbate (figuratively, but sometimes on the phone, I wonder) and generally gestate his deals until they’re either killed off by the funder, mortgage insurer or people like me in a fit of barely restrained despair.

So, why am I bothering to write about my daily angst concerning people like Doug? For starters, let me just say that eleven hour days populated by users and takers like him aren’t exactly energising, but my concern runs deeper. I’m much more concerned for the people that brokers like Doug prey on. Yes, that’s right. ‘Prey on’. There is a section of the finance broking community which will deliberately go about seeking what is colloquially described as ‘bruised credit’. In America, they’re known as sub-prime and I think we’re all familiar with the term, and at least some of the impacts of dealing with sub-prime loan candidates in a marketplace which is less than prudential. Why do you think your home loan rates have jumped 3% in 2 years?

My concern runs to the borrowers, and isn’t that everyone? We all have debt. Some of us have retail, residential, consumer debt. Some have business-oriented commercial debt and some have corporate debt. In my experience the knowledge level of what I call the ‘compus’ rating runs in a reverse relationship. Holders of corporate debt – large companies which own other companies, which conduct business through firms they own, are generally so structured that the debt they hold is well structured because ASIC reporting requirements demand it be so. The knowledge level of individuals required to manage such debt is generally very, very high. Business-oriented commercial debt, depending on the complexity of the business, which is usually SME or small-to-medium-enterprise business, is generally well structured and managed, not by the business owners themselves, but by financial advisors, controllers or CPA’s. In my experience, the latter is usually the former two anyway. Not perfect, but reasonably thorough because the continued existence of the business, and ongoing employment of the financial controller depends on how good they are at what they do. SME’s are more taxation-oriented than corporates, but that’s a generalisation. SME’s answer only to the owner, Corporates answer to many, many owners, not to mention bonus hungry executives, middle management, yadda yadda. It’s a complicated picture.

It’s those at the bottom of the pool with whom the most danger lies in relation to debt. From the funder’s perspective, the borrower’s perspective and from the broader community’s perspective. Your average retail, residential, consumer borrower – the hinge around which our nation’s fiscal structure seems to pivot – knows seven-eights of three-fifths of sweet fanny adams about how the financial system works, what their real obligations in borrowing money are, and the repercussions of not adhering to those obligations. The number of applications I see where borrowers have missed payments on existing liabilities for one reason or another, and then expected a funder to simply accept them as a good risk because they claim they are, I’ve simply lost count of (okay, I don’t keep count, but you get my drift). Similarly with those who don’t pay bills because in a fit of pique they feel they’ve been cheated by Telstra or the local garage, only to find they have a default on their credit record. Then there’s the quasi-business person. The so-called professional investor-cum-property developer who’ll get in just a tad too deep, bail out and find out later on that outstanding council charges on their speculative development have been lodged as a court writ. "Hey…..I’m an honest person! I didn’t know they’d go that far! Anyway, it’s paid, isn’t it?" Too bad, so sad. In the current climate, anything more than a telco default will get you a big, fat NO! to your application.

It’s the bottom of the pool that brokers like Doug ‘prey on’. I suppose it’s why his kind are called bottom feeders by my kind. They say scum floats to the top, but in my experience, the scum at the top doesn’t stink anything like the crap on the bottom. But we’re going to have a brand new regime of legislative restriction placed on the broking industry, aren’t we? Supposedly, but will that really change anything? Will ASIC be resourced sufficiently to police the bottom feeders? I doubt that. ASIC can’t stop the corporate carrion eaters, how the hell can it be expected to police the minutia of the finance game? To my mind, unless and until the general populace is educated into the way retail/consumer finance works in this country, bottom feeders will continue to flourish. It’s not the job of people like me to tell bottom feeders that they aren’t acting ethically, or doing their own industry any favours. It’s up to the industry bodies. The Mortgage and Finance Association of Australia and the Finance Brokers Association of Australia. Those bodies make a lot of noise, but like all empty vessels, they simply do what they’re best at.

Legislation, regulation, threat and penalty won’t clean up the finance game. Education and knowledge will. Not of the actors in the play, but of the audience. Teach the audience what they’re watching and the sleight of hand will suddenly be seen for what it is. There’s an old sage which says you cannot legislate for stupidity. It’s time stupidity was put down and the people made strong in the face of the users and takers. Time my job became a lot more educational and satisfying than frustrating and discordant.

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