Written by Robyn Styles
Key Account Relationship and Development Manager - Affinity
The publication of the recommendations from the Royal Commission into Banking on Monday 4 February, caused considerable shock within the mortgage broking industry. Several media outlets led with proposed measures to eliminate commissions, giving an impression that the ‘principal evil’ within the finance sector was independent mortgage brokers. This left many within the profession feeling that the track record and culture of the big banks was less of a target than your corner of the industry. This seemed unfair, given that since its emergence as a financial sub-sector, the mortgage broker industry had been working harder against ‘slam-dunk’ mortgaging by the big four banks than any other.
Fortunately, in the two weeks since the release, a growing number of voices have joined in support of the mortgage broking industry – pointing out that hampering or even eliminating it from the mix would result in considerably less choice for consumers.
The value of the mortgage broking industry
According to Deloitte Access Economics, the mortgage broking industry contributed an estimated $2.9 billion to the Australian economy in 2017 and provided more than 27,144 full-time equivalent jobs. As Prime Minister Scott Morrison said in the Sydney Morning Herald, 11 February, “These are tens of thousands of small and family businesses that help mums and dads get a good deal on their mortgage and so they don't have to just face the banks themselves.”
Mortgage brokers are a key part of enabling a growing population to find a home. In recent years, consumers have increasingly chosen to deal with the mortgage broker channel. From less than 5% two decades ago, 59.1% of all residential loans were settled by mortgage brokers by September 2018, according to the Mortgage Finance Association of Australia’s (MFAA).
Because mortgage brokers give consumers more choice – beyond the traditional Big Four banks – they have also increased competition within the financial services industry. Where once there were half a dozen or so options for a home loan, there are a plethora of retail lenders today. Many of these compete by keeping overheads low and would be challenged growing a direct customer base, but mortgage brokers on the lookout for cost-effective loans can bring them to the attention of their clients.
Scott Morrison recognises this role. “I want to see as many mortgage brokers in this country, five years from now, in fact, more than there are today. I don’t want to see this sector wither on the vine and be strangled by regulation that would throw them out of business, but more importantly, would deny choice and competition in the banking system.”
Maintaining choice and competition
As echoed by Scott Morrison, the greatest concern in the wider financial services industry is that the Haynes recommendations on mortgage broking will swing the industry power to the major banks. In the September 2017 quarter, 27.9% of loans were arranged through lenders other than the big four.
The head of the country's biggest retail mortgage broker, Aussie Home Loans CEO James Symond, quickly warned that scrapping commissions will force a wave of brokers out of the industry, limit access to credit, and boost the dominance of the big banks. “It’s extraordinary. This whole royal commission was all about making sure consumers were left in a much better position, but as far as mortgage broking is concerned, you’ve got a royal commissioner who’s basically asking the consumer to pay the fee rather than the banks, which is crazy," Symond was quoted in the Sydney Morning Herald, 11 February.
So industry and the Coalition government are in agreement: if mortgage brokers are taken out of the equation, home loan customers will lose access to smaller lenders and find it harder and more expensive to get loans. Less competition will result in higher interest rates. Worse, some groups may not be able to source finance at all – impacting first-home buyers, the self-employed and the less advantaged such as one-parent families. Perhaps the greatest impact of reduced competition will fall on Rural and Regional consumers.
Why change the business model?
Commentary since the recommendations has highlighted the difficulty of changing the model of trail commissions and upfront payments upon commencements from lenders. While Haynes prefers to see consumers pay mortgage brokers directly, few see this as viable.
As James Symond said, “Once people don’t pay for something for so very long, it’s very hard to get them to pay for it.”
The benefits of trail commissions are experienced by all parties to a loan. The mortgage broker undertakes a wide range of activities to ‘earn’ the trail commission, such as interest rate reviews, administration changes and refinancing, to mention just a few – activities that lenders are ill-equipped to perform themselves. Trail commissions also make it in the broker’s interest to support the consumer in meeting their loan obligations.
In fact, while a strong focus of Royal Commissioner Haynes’ recommendations was on ending trailing commissions, there is an argument that their greater use offers a solution to excessive risk-taking. Properly structured, this type of commission payment ensures that mortgage brokers will aim to craft loans in the interests of both the lender and borrower so that they last the distance.
Post Royal Commission: 4 Risk Management Actions for Mortgage Brokers
There is no doubt that the debate will rage for some months to come. So what can mortgage brokers do in the interim? Here are four recommendations from an insurer's perspective:
1. Develop your case
All of a sudden, mortgage brokers are in the news, cast as The Bad Guys! Be ready with a fact-based defence of the value of your industry – whether with clients, business partners or even your friends and family over the barbie! For some ideas on strong points to make, see Mortgage Finance Association of Australia’s (MFAA) summary of key recommendations from the Royal Commission impacting on brokers here.
2. Make yourself heard
Industry bodies such as the MFAA have developed strategies for representing the interests of their members – including lobbying federal politicians at the highest levels. Every little bit helps. You and your customers can sign a petition to your Federal MP at www.brokerbehindyou.com.au - an MFAA initiative. The Finance Brokers Association of Australia (FBAA) supports change.org petition to the Treasurer and Prime Minister, as well as their opposite numbers in the Labor Party.
You should also consider ‘grass roots’ personal approaches to your local members of parliament – both federal and state. You are a taxpayer and a current (or potential) employer!
3. Deal with complaints fast
While criticisms of the industry are being made from ‘the high ground’, mortgage brokers may possibly see more complaints and queries from unhappy consumers coming their way. At Insurance House, we advise clients of our Mortgage and Finance Broker Indemnity Insurance to report consumer complaints promptly, in accordance with their policy.
4. Focus on your clients and business
While the recommendations may or may not become law, now’s a time to focus on doing what you already do really well – which is looking after your clients. They still need home loans! Take time to consider how you can work towards adding value to them.
Also, consider your business and look for opportunities to diversify. What services could you add to your mortgage broking portfolio?
It’s also a time to network with your peers – look after and support each other.
What next for mortgage brokers?
Uncertainty is in the air. But, as evidenced above, early reactions to the Haynes recommendations indicate that the value of the mortgage broking industry to Australian finance consumers is well understood and acknowledged.
Here at Insurance House, we’re keeping a watching brief – and working with industry associations and leading broking firms to help support them in the struggle ahead.
If you have any questions about our Mortgage & Finance Broker Indemnity Insurance cover, please contact our Customer Service team on 1300 444 142 or email email@example.com.