I write to you as a mortgage broker customer to ask you to continue to support the mortgage broking industry in the wake of the Hayne Royal Commission recommendations that would have devastated the industry.
It is very important to me and my community that you do not cut my access to an affordable home loan by handing power back to the big banks and killing competition in the home lending market.
I appreciate that the Federal Government and Opposition have acknowledged that enforcing a customer paid fee for service model on the mortgage broking industry is not appropriate. I welcome these decisions, given this would have made the broker channel unsustainable, severely reducing competition and consumer choice, and curtailing access to credit for all Australians.
These recommendations would have delivered a massive windfall to the major banks, by forcing customers back into their branch networks.
However, it remains critical that any changes made to the way brokers are remunerated are designed to protect customer outcomes by preserving competition, choice and access to credit. The only way to achieve this is to safeguard broker viability by preserving the current economics of the industry, rather than enhancing bank profit.
Killing competition and taking my choice away is likely to result in:
- Increased fees and interest rates for customers – as banks seek to restore their declining interest margins and increase profit without intense competition to keep prices down.
- Further diminishing availability of credit – especially for customers in regional and rural Australia, where bank branch numbers have fallen, and for lower income customers with more complex credit needs such as first home buyers.
- The end of trade for many of the 17,000 small broker businesses, and the resultant loss of up to 27,000 FTE jobs across Australia.
My broker provides me with access to a panel of lenders – many of them smaller regional lenders – to help me get a fairer deal on my home loan. My broker also helps me to navigate the increasingly complex and uncertain application process, and helps to ensure that my loan is appropriate and affordable.
Mortgage brokers are critical to competition in the home lending market in Australia.
Mortgage brokers originate almost 60 percent of all Australian home loans, and act as a shop front for lenders of all sizes and particularly those without large branch networks. These include credit unions, regional banks, international banks, non-major banks, building societies, mutuals and non-bank lenders.
The competition that brokers have brought to the market has contributed to a fall in net interest margin of more than three percentage points,* which delivers lower interest rates to all Australian homeowners, and interest savings of more than $300,000 on a $500,000 thirty-year home loan.
The important pro-competitive impact that brokers have delivered has been acknowledged in recent reviews of the mortgage broking industry by ASIC, the Productivity Commission and the Australian Banking Association. Treasury also noted in its submission to the Royal Commission Interim Report, that:
“If mortgage broking activity diminishes, this could have a significant detrimental impact on competition in the mortgage market. The potential beneficiaries of any lessening of competition would be the major banks with established branch networks”.
Despite the fact that the Federal Government and Opposition have made positive steps towards preserving the viability of the mortgage broker industry, I am concerned that this is an extremely complex policy area, and many of the key issues have yet to be resolved within specific, stated policy positions.
Of particular concern to me is the potential removal of trail commissions. As a broker customer, I do not believe the case for the removal of mortgage broker trail commission has been made; nor have I seen any evidence that existing trail arrangements lead to poor customer outcomes.
On the contrary, I believe trail provides a strong control mechanism within broker remuneration, as it is contingent income that requires that the loan does not go into arrears, is not refinanced, and does not involve fraud. Therefore, trail is not guaranteed. It is a control mechanism that aligns interests and ensures that the broker focuses on me as a customer rather than simply driving the next transaction.
This aligns with Treasury’s submission to the Royal Commission’s Interim Report, which indicates that a broker’s incentive to push through a deal – regardless of its suitability for the customer – is exacerbated by removal of trail. The submission states that:
““…conflicts could be worsened absent existing claw-back mechanisms and trail commissions as the broker does not stand to lose the fee received if the loan ceases to perform.”.
Whilst I understand that the Federal Government has decided to leave the current arrangements for mortgage broker trail commission in place pending a review in 2022, I strongly urge all policy makers to consider the unintended consequences before making changes to broker trail commissions.
Finally, I was surprised to see that while the Hayne Royal Commission (which was implemented to tackle misconduct), found very little evidence of broker misconduct, its recommendations appear to have focused on brokers. The recommendations appeared to ignore the reforms already underway.
The mortgage broking industry is well aware of the need to continuously improve its practices and to ensure that customer outcomes remain overwhelmingly positive. That is why the industry came together more than 18 months ago to respond to all six recommendations made by the ASIC Review of Mortgage Broker Remuneration. Through this self-regulation, the mortgage broking industry is addressing conflicted remuneration, improving disclosure and reporting, introducing a holistic approach to industry governance, strengthening its obligations to customers and introducing an enforceable, compulsory industry code.
For example, volume-based bonus commissions and campaign-based commissions are no longer paid in the industry, and the industry will be implementing a change that pays a broker a commission only on the drawn loan amount net of any offset balance, removing any incentive to arrange larger loans than required.
These industry-led reforms are focused on ensuring that my needs as a customer are prioritised, and that brokers will continue to deliver strong outcomes for customers.
The industry is committed to this reform agenda even though the Hayne Royal Commission and the two most recent, comprehensive reviews of the industry (ASIC’s Report 516 and the ABA’s Sedgwick Review) made no findings of systemic harm.
The industry is committed to this reform agenda despite the exceptionally strong industry data which shows:
- Increasing consumer support and high satisfaction
- Extremely low and falling complaints
- Low customer arrears
- Increasing competition driven by brokers, particularly for regional and smaller lenders.
But most importantly, it is committed to this reform agenda because it will strengthen outcomes for customers like me without destroying the industry and handing power back to the big banks.
I urge you to continue to support mortgage brokers, and to continue to transparently outline further detail of your policy proposals in regard to mortgage brokers and confirm that the current economics will be preserved, so all Australians can understand what is planned for mortgage brokers, and their customers like me.
*Deloitte Access Economics, The Value of Mortgage Broking, July 2018.