Banking royal commission: breaking the brokers isn’t very helpful

Who would have thought a year ago, as the royal commission got under way in Melbourne, the outcome would entrench further the power of the big four banks, whose behaviour triggered the scathing saga in the first place?

The spectacular resignations of the chief executive and chairman of National Australia Bank this week gave the impression the big end of town was under siege.

But NAB and the other big three are all fine, their profitability hinging on regulation and the state of the economy far more than on personnel. The 500-page final report of the Hayne royal commission applied kid gloves to the big four, but sowed the seeds of destruction for the mortgage broking industry, dominated by small businesses.

Brokers now receive an upfront commission from the lender as a percentage of the loan and then a smaller “trailing commission” each year for the life of the loan. “However deeply entrenched may be the convention … the remuneration arrangements have no credible rationale based on consumer interests; and second, that they actually work against consumer interests,” said Kenneth Hayne. He said both types of commissions should be phased out over two or three years.

Would you fork out $2500 cash to a mortgage broker to help you pick a loan? Probably not. Banning commissions reduces one of the banks’ biggest costs of writing loans. No wonder the share prices of the big four enjoyed among their biggest one-day increases in corporate history. Those of the two biggest mortgage brokers, Mortgage Choice and AFG, crashed by about 30 per cent.

“It’s very disappointing that the royal commission wants to destroy some 20,000 small businesses for the monetary gain of the big banks, and we trust the government will see clearly on this and continue to work extensively with our industry to improve consumer outcomes,” says Peter White, head of the finance brokers association.

About 55 per cent of new home loans are issued through brokers, according to corporate regulator ASIC’s 2017 investigation into mortgage broker pay. On the stand at the commission last year, CBA chief executive Matt Comyn said about 1300 brokers earned more than $1 million a year, helping stoke some animosity towards the sector. But the bulk earn far less.

The Morrison government has backed abolishing trailing commissions but not upfront payments, a decision endorsed by Reserve Bank governor Philip Lowe in a speech on Wednesday. The Productivity Commission’s final report into competition in the finance sector, released in August, similarly called for ending trailing commissions but keeping upfront payments in the interests of competition.

An upfront commission structure gives brokers a powerful incentive to encourage borrowers to take out larger loans. And it’s probable that the sector is too large, given most borrowers’ ignorance that they are in effect paying for the service via a higher interest rate.

But it’s mortgage brokers who also help smaller lenders compete, providing them with a ready-made distribution network. Fewer of them could mean the lenders would have to hire more direct sales staff. Labor backed the recommendation in full, although it has curiously added an “in principle” qualification since the report’s release.

Whatever the case, fewer mortgage brokers mean fewer small businesses. The commission’s report is part of a trend that is increasing regulation on business, fuelling growing concentration across the economy.

It’s not only in banking. Qantas has announced it wanted to buy Alliance Airlines in Western Australia. Vodafone wants to merge with TPG. For owners of digital competition to the big banks — known as fintech firms — the dream is to become enough of a threat to be bought out by one of them.