Brokers on tenterhooks

The nation’s mortgage broking industry is nervous ahead of the release of Hayne royal commission’s landmark recommendations.

The nation’s mortgage broking industry — which has injected much-needed competition into the $1.7 trillion home loan market — is nervous ahead of the release of Hayne royal commission’s landmark recommendations.

Any sweeping calls by commissioner Hayne to scrap or change the entrenched commission-based pay model would have far-reaching implications for mortgage brokers and the industry’s economics.

But the pay issue is a vexed one, because each alternative model comes with its own set of problems.

During Hayne’s final round of hearings, ANZ chief Shayne Elliott and Macquarie’s then boss Nicholas Moore both emphasised that a flat fee charged to the borrower could cause problems. Elliott noted that flat fees could encourage borrowers to take out bigger loans to avoid paying charges twice if they wanted to renovate later, while Moore said customers would suffer “sticker shock” if they saw the quantum of fees they had to pay for a broker.

Other banks that are less reliant on mortgage brokers say flat fees would allow them to pass on lower interest rates to customers, as they pay less out to brokers.

But given his statements in the interim report it’s unlikely Hayne will let the status quo continue.

“Value and volume-based remuneration for intermediaries in the home loan industry has been an important contributor to misconduct and conduct falling short of community standards and expectations and poor customer outcomes,” the interim report says.

Both sides of politics will be lobbied hard regardless of what the Hayne document — to be unveiled on Monday afternoon — recommends. Neither side, though, will want to erode the competitive dynamics that help smaller lenders access more customers via brokers.

Macquarie’s Moore was right about mortgage customers not wanting to pay for brokers, particularly as banks fork out the commissions now.

Brokers account for a record 59 per cent of all home loans written, making them a force to be reckoned with.

A poll of more than 5800 customers of banks and brokers, released yesterday, found about 60 per cent said they would not pay a fee-for-service to use a mortgage broker, according to research house Momentum Intelligence.

It found that just 3.5 per cent of consumers would be willing to pay a fee equivalent to the average upfront broker commission, currently paid by banks.

Momentum’s survey found 96 per cent of borrowers were satisfied or very satisfied with their mortgage broker and 95.8 per cent would choose a broker again.

Under the current pay model, banks and other lenders pay brokers an average upfront commission of 0.54 per cent of the loan at settlement and a trail commission of 0.18 per cent annually over the mortgage’s life.

Part of the issue is that banks often raise their commission rates for periods to boost their home loan market shares.

Even so, a move to a new pay model may not solve the potential for brokers to act badly.

The royal commission assessed other structures around the world, including a Dutch flat-fee model with no ongoing commission, while in Canada, brokers are paid only an upfront commission.

The argument against the upfront commission-only model — which was also advocated by the Productivity Commission — is that it incentivises churning customers into new loans more often. That could be solved, however, via clawback provisions for commission payments.

The industry, spearheaded by a Combined Industry Forum, has attempted to get on the front foot on a number of issues raised by the corporate regulator, and says the measures it is taking to self-regulate should alleviate concerns.

Reforms already implemented by the CIF include ending bonus commission payments, only allowing brokers to be paid on the amount of a loan drawn down (removing any incentive for a customer to be persuaded to borrow more), moving away from benefits including entertainment and conferences offshore, and clearer disclosure of broker ownership.

Those moves are understood to have already led one broking group to cancel a conference in Vietnam planned for 2019.

Either way — and whatever Hayne’s read is — a professionalisation of mortgage broking is long overdue.

The CIF is now preparing a second report for Treasury and the corporate regulator on its progress. It is still working on several measures including developing and finalising a code of conduct covering enforcement, monitoring and supervision in 2019.

Another target, which will be mandated by year’s end, is establishing a public reporting regime where brokers disclose what proportion of loans is going to which bank. Broking aggregator Connective’s executive director Mark Haron has made it a part of doing business earlier than required — from January this year — because he sees disclosure and transparency as a “key piece of the puzzle”.

As the Hayne countdown continues, there are powerful interests involved and $1.6 billion at stake. CBA’s chief Matt Comyn, for example, has put brokers in the firing line as CBA seeks to save on commissions paid and argues that brokers don’t provide a lot of customer value after year one.

Credit Suisse analysts have said the big banks stand to benefit greatly if mortgage broker pay is changed. The bank sector would reap annual savings of between $800 million and $1.6bn.

JPMorgan expects Hayne will ban broker trail commissions and introduce a broader “best interests” duty in the mortgage market. The industry’s nervous wait is almost over.