Banking Royal Commission v Mortgage Broking
On Monday afternoon 4th Feb the 76 recommendations of the Royal Commission into misconduct into the banking, superannuation and insurance industry were released. I’d like you to take particular note of the word ‘misconduct’. There is no doubting that incidents of this misconduct driven by ‘greed’ are too numerous to list here. One interesting question is how do you legislate ethical and moral behaviour? The financial services industry is no different to any other industry where the pursuit of material wealth & power comes into conflict with acting in the best interests of another party. It’s a broad reflection of the type of society we live in. So enough of this philosophical ‘tug of war’ for now.
Of particular interest to me was the recommendation by Royal Commissioner ‘Haynes’ to remove the mortgage brokers current commission structure of upfront and trailing commission paid to the brokers via the financial institution, and replace it with a ‘fee for service’ model. I want to tackle this issue from two perspectives and explain the advantages of leaving the current commission model in place. The first being from the consumer’s/customers view, and the latter being the implications for the mortgage broking businesses:-
Clients of Brokers
Under the current commission structure there is no monetary disadvantage to clients. They are ‘not out of pocket’. They get the use of a professional service which is paid for by the banks to the broker channel. This is explained to clients by brokers every day and legislation under National Consumer Credit Protection laws put in place in 2010, protects clients through ‘responsible lending practices’. Brokers fully disclose this to clients.
Brokers are not driven by sales targets or volume bonuses that are paid in the case of bank employees. It’s these systems that have created the sale of products & services which are ‘unsuitable’ to clients needs. Any volume payments to brokers that were in place were removed some time ago. They act on behalf of the client.
The upfront commissions ‘clawback’ structure supports clients and ensures the broker acts in their best interest. This is in place for up to 2 years after the loan is settled. The last thing a broker wants is to lose their commission because they have recommended an unsuitable product to a client!
A ‘fee for service’ model would see increased costs to the borrower for obtaining finance, either via the broker or the lender.
Assuming the removal of the current structure would decimate the broker channel, which it would, as many brokers are small businesses and could not remain viable, this would significantly reduce competition leaving clients to either research products themselves, or return to the major banks with shopfronts. There are currently 17,000 brokers throughout Australia. They are at present writing close to 60% of home loan applications, and 50% of these loans are directed through non major banks that have no shopfronts. These are the likes of credit unions, building societies which have very competitive products and efficient service. They also include the likes of ING & Macquarie Bank which certainly do not have shopfronts in regional areas. Brokers are their shopfronts! What happens to clients that live in towns where there are no major banks present?
As at May 2018 the ‘Consumers’ Net Promoter Score (NPS) of brokers is in excess of +70, with more than 90% of customers reporting satisfaction with their broker’s performance, according to Deloitte Access Economics. This compared to an average NPS for the four major banks that is normally negative and was -15.7% at that time.
Brokers (certainly in regional Australia) are not driven by the transaction. They are driven by the relationship with their clients. They are proactive & are in regular contact with their clients over many years. If a clients interest rate becomes uncompetitive with their bank it is unlikely they will receive a phone call from that lending institution advising them that they will reduce the interest rate. So once again the broker acts as a competitive viable option for clients. The trailing commission paid to them by the banks is warranted on the basis of this constant follow up ‘relationship’ focused work that they do for their clients.
Brokers are the hub in the home loan process. They are the ‘go to person’ where estate agents, solicitors and lenders are focused on their particular roles , the broker is overseeing the process from start to finish . Similar to a foreman on a construction site. The value adding aspect of this is immeasurable.
As mentioned above there are currently 17,000 mortgage broking operations in Australia. Now using Port Macquarie as an example, lets’ assume we have 30 broker operations. These are in the main small businesses . They operate with just one or sometimes several loan writers, plus one or several administration staff. If these small businesses are shut down due to changes with this commission structure , then you could assume the loss of 45 jobs. That may not seem a lot but consider the ripple effect throughout regional Australia alone, at a time where the economy is facing some headwinds with a slowing construction industry , and an overall slowdown in forecast economic growth?
At the time you will read this I will have just ticked over 40 years of employment in the finance sector (13/2/19) . During that time I have sat in marketing roles, management, credit assessment, business banking, and training and education positions. Multiply my practical and theoretical knowledge by countless numbers of other mortgage brokers and consider the loss of this knowledge to the industry?
Just because a Royal Commission recommends a certain change it should not be considered ‘gospel’. There has already been significant work undertaken in a proactive fashion well before the Royal Commission was announced into researching the mortgage broking industry through productivity reports, with input from various stake holder groups, banks, credit unions, brokers, Government treasury, ASIC , peak industry bodies etc. All of which has recommended great care be taken before dismantling the current mortgage broker commission structure because of its negative impact to consumers in significantly diminishing competition in the home loan market , and increasing costs. It’s no surprise that the listed share price for all the major banks jumped dramatically at the publishing of this report because investors & shareholders of those ‘big 4’ could see the windfall that would ensue in driving customers back through the doors of those banks. This is certainly not in the customer’s best interest!
I will now finish by reminding you of that word ‘misconduct’. Banks can pay for their ‘misconduct’, but as a mortgage broker who values his integrity and has acted with a moral compass throughout his lifetime in this industry, I see no justice or fairness in the decimation of our valuable business model. I would urge clients of all mortgage broker operations to voice your opinion in support wherever and whenever it is appropriate.
If you have any questions please contact Michael on 02 6583 2211.