I write to you as one of Australia’s 17,000 mortgage brokers 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.
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. We 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.
An unsustainable broker channel 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.
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, particularly smaller lenders without large branch networks. These include credit unions, regional banks, international banks, non-major banks, building societies, mutuals and non-bank lenders. It is these smaller lenders that provide competition for the major banks in the home loan market, and their continued ability to distribute their products through mortgage brokers is key to keeping home loan interest rates for Australians as low as possible.
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 competitive impact brokers have delivered has been acknowledged in recent reviews of the mortgage broking industry by ASIC, the Productivity Commission and the Australian Banking Association (ABA). 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, this is an extremely complex policy area, and many of the key issues have yet to be resolved within specific, stated policy positions.
We acknowledge that the Federal Government has decided to leave the current arrangements for mortgage broker trail commission in place pending a review in 2022. I greatly welcome this move, and believe it is an acknowledgement that the case for the removal of mortgage broker trail commission has not been made; nor has it been demonstrated that existing trail arrangements lead to poor customer outcomes. On the contrary, trail provides a strong control mechanism within broker remuneration, as it is contingent income that was previously paid upfront, but which is now paid over the life of the loan – provided that the loan does not go into arrears, is not refinanced, or does not involve fraud.
Therefore, trail is not guaranteed. It is a control mechanism that aligns interests and ensures that the broker focuses on the customer relationship rather than simply pursuing 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”.
I strongly urge all policy makers to consider the unintended consequences before making changes to broker trail commissions.
While the removal of trail commission would not be a good customer outcome, in the event it was to be removed, it would be critical that overall remuneration to mortgage brokers is unchanged.
We therefore ask that any changes are structured in a manner that preserves the current economics and compensates both the broker and the aggregator for the full economic value foregone over the life of a loan. If trail commission was to be removed, this would require a sufficient increase to upfront commissions to replicate the current industry economics for both the broker and aggregator over the life of the loan.
Any new remuneration structure should also take into account the needs of different aggregation models, different products and the numerous variables that impact on a broker’s earnings over the life of a loan to ensure that the current economics are preserved.
Finally, while the Hayne Royal Commission (which was implemented to tackle misconduct) found very little evidence of broker misconduct, its recommendations focused disproportionately on brokers. Equally, the recommendations appeared to ignore the significant industry-based 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. To that end, following the 2017 ASIC Review of Mortgage Broker Remuneration, the industry came together to implement all the recommendations from this review.
Through the Combined Industry Forum (CIF), the 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.
The CIF’s reform agenda is progressing well, and has had the strong support of both ASIC and Treasury. For example, volume-based bonus commissions and campaign-based commissions are no longer paid in the industry, and the industry has implemented a change that pays a broker commission only on the drawn loan amount net of any offset balance, removing any incentive to arrange larger loans than required.
The industry is committed to the CIF 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 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
One clear example of the relative lack of misconduct by brokers is reflected in the data from the newly-formed Australian Financial Complaints Authority (AFCA). In November 2018, AFCA’s first month of operation, it received 6,522 complaints regarding financial products and services of which 29 (or less than half of one percent) were attributed to mortgage brokers.
The industry is committed to our reform agenda because it will strengthen customer outcomes and ensure the sustainability of the systemically important mortgage broking industry.
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 the sector.
*Deloitte Access Economics, The Value of Mortgage Broking, July 2018.