INDUSTRY OUTLOOK -- Viewpoint

Improving economic conditions and impending regulation will reshape the industry and redefine the role of the broker, The Adviser’s quarterly roundtable has revealed.

Steven Heavey (SH)

St George

Jeff Zulman (JZ)

Vow Financial

John Flavell (JF)

NAB Broker

Tony Carn (TC)

Homeloans

Kim Cannon (KC)

FirstMac

Andrew Russell (AR)

Firstfolio One

1. WHAT OPPORTUNITIES DO YOU BELIEVE WILL EMERGE FOR THE BROKING INDUSTRY ONCE REGULATION COMES INTO PLAY THIS YEAR?

JZ: On the surface, increased regulation seems an impediment to doing more business; undoubtedly it will involve more paperwork and higher costs. But Vow believes there is an opportunity for brokers to use the new regulatory regime to write more business. Why? Brokers will have to spend more time explaining the product to clients, and, in the process, should establish a better relationship with them. It won’t simply be a straight sales transaction; there will be an element of ‘educating’ clients about the different products on offer.

Brokers who adapt quickly to the new regime – who embrace it rather than disparage it – will gain a marketing edge as clients appreciate getting a fuller understanding of what they are buying.

TC: I think the introduction of regulation will greatly improve the broker proposition.

History shows us that consumers deem those brokers governed by regulation as being professional.

Over the past few months, we have enlisted an independent research house to conduct extensive research on the broker channel. Our research shows us that 40 per cent of consumers will use a mortgage broker to obtain finance for a house. If we break that down and look at each state independently, 35 per cent of consumers will seek out a mortgage broker in New South Wales, while more than 55 per cent are happy to use a broker in Western Australia.

Coincidently, Western Australia happens to be the only state in Australia where regulation is already in place. This indicates that consumers respond more positively towards ‘professional’ brokers.

SH: [Insights] from the UK [market] suggest that some brokers will exit the market, [thereby] providing opportunities for the licensed broker to grow their business.

Similarly there are some great opportunities for brokers to present themselves as an ASIC licensed professional, increasing the confidence in the broker proposition from a consumer perspective. St George accredited brokers already meet a stringent set of standards and high levels of professionalism, so we expect that they will have little difficulty rising to the challenges of regulation.

2. AS THE INDUSTRY ADVANCES TO A HIGHER LEVEL OF PROFESSIONALISM, TO WHAT EXTENT SHOULD BROKERS PROVIDE RELEVANT PRODUCT ADVICE TO THEIR CLIENTS?

JF: I think if you asked a consumer what they are getting from their broker, the core response would be ‘advice’. There is a great opportunity for brokers to work with their customers’ comprehensive life plans, as opposed to just providing product.

While mortgages will always remain a cornerstone of the broker profession, brokers will also be able to offer their customers protection solutions (including insurance) as well as other solutions. If they can deliver all of these solutions they will be able to provide advice properly.

Consumers have a range of needs. And as it stands, not all of a consumer’s needs are being met by brokers. Instead, they have to be met by other industries and companies. So, under the regulatory framework, I think we will see brokers start to expand their solutions provision, and in turn, capture a greater number of customers.

JZ: There are two distinct trends behind the industry’s growing professionalism: regulatory and commercial. The new regulations will force a higher standard of professionalism on the industry, and a tougher market environment for traditional mortgages will ‘encourage’ brokers to expand their suite of products.

In this climate, mortgage brokers will have no choice but to undertake the requisite professional training to develop the necessary skills to provide the relevant product advice to their clients. The regulator and the market will both demand it. The industry is becoming more sophisticated, more complex, more demanding, but, at the same time, for those brokers who have the ability and ambition to meet these challenges, it will be more rewarding and more fulfilling.

KC: Providing relevant product advice is the lifeblood of a broker’s business. If a broker ends up merely acting as a conduit for one or two lenders then they’re probably not going to be meeting the expectations of their clients. In fact, they are really nothing more than a de facto employee in that circumstance. Brokers play an incredibly important role in the lending sector and I think real opportunities will come from them maintaining their stance as independent and knowledgeable advisers. This puts the onus on the broking community to maintain a focus on excellence in both information and delivery.

3. WHICH MARKET SEGMENTS DO YOU EXPECT TO PROVIDE THE BEST OPPORTUNITIES FOR BROKERS IN 2010?

JF: First home buyers occupied a disproportionately high portion of the market last year, buoyed by the federal government stimulus. As that normalises the proportion of activity across the other sectors will grow, relatively speaking.

As I move around the country speaking to brokers, there doesn’t seem to be any one customer segment that is greatly outdoing another. Brokers are saying that they are busy across a number of fronts, including investors and upgraders. There are also a lot of brokers that are assisting their customers with refinancing.

There is still a shortage of housing [as well as] a shortage of new dwellings being constructed. So, as in any market, I think we will start to see supply and pressure drive demand.

SH: Market segments that have been associated with first home buyers could see a moderation in coming months. In contrast, segments that are closely linked to investors and upgraders could be well supported. Investors could continue to enter the housing market given higher dwelling prices and rising rents amid a tight rental market and strong population growth. Investors and upgraders should also be encouraged by the improving jobs market and sharp rally in domestic equities since March.

TC: I believe all segments will continue to provide opportunities for brokers. However, our research shows that there are some market segments that are more inclined to use a broker to obtain housing finance, suggesting brokers should concentrate on these market segments.

According to our research, second home buyers are less likely to use a mortgage broker than say first home buyers or investors. That said, our research shows us that less than 30 per cent of home buyers will go directly to a bank branch, which means the majority of consumers are taking full advantage of comparison websites and other social media tools to find the best product for their needs.

There is still, and always will be, a large market for brokers. 37 per cent of home buyers said they would use a broker for advice on what products and [which] lenders best suit their needs. As legislation begins to play a greater role in the mortgage industry, brokers should see their market share improve as more consumers equate brokers to professional advisers.

AR: Two clear segments will be the drivers of activity in 2010: the upgrader wishing to lock in past capital gains by moving into the next pricing tier, and investors that are becoming more bullish as both yields and house prices start rising with greater velocity as the next upward swing in the housing cycle begins.

4. IF FUNDING COSTS CONTINUE TO RISE SHOULD LENDERS BE EXPECTED TO SHOULDER THIS BURDEN OR PASS IT ONTO THE BORROWER?

JZ: The federal government guarantee allowed the banks to subsidise their borrowing costs in a period of uncertainty. But with the capital markets returning to a degree of normalcy, and with the government flagging the eventual removal of the guarantee, expect the cost of their borrowings to rise.

It would be nice to think lenders would absorb this higher cost, but commercial reality dictates it will be passed on to consumers.

Lenders have already demonstrated a preparedness to lift rates independent of movements in official rates, so it would be surprising, to say the least, if consumers didn’t end up paying for the higher cost of lenders’ borrowings.

SH: St George continues to carefully monitor funding costs and we are very mindful of the impact that increased funding pressures have on our customers, which is why we have absorbed increased costs as best as we can to protect customers. While we never speculate about future interest rate movements, we will always manage interest rate decisions in the interest of all of our stakeholders.

AR: The question remains whether funding costs are rising or that banks are using the fallout of the GFC a way to continue to drive margin growth across their mortgage portfolios. This strategy only hurts the customer and emphasises the importance of rebuilding competition – particularly in the non-bank space.

Moreover banks’ funding pressures and monetary policy need to be reviewed and coordinated to ensure that the economy and the industry gains confidence and momentum within boundaries of the inflation targets set by the RBA.

JF: Every lender will determine its position surrounding funding costs and managing their margins. So while I can’t give an overview on behalf of the whole industry, I can speak on behalf of NAB and say [that] while we are focused on the economics of our business and sensitive about the cost of funds, we are determined to be recognised as a bank that delivers fair value to customers.

We have made several movements lately that show our commitment to our customers. While some of our competitors raised rates in recent months we took a fair value approach and we want to continue to do what is absolutely best for our customers.

5. THE CASH RATE HAS RISEN FROM A HISTORICAL LOW OF 3% TO 4% SINCE APRIL LAST YEAR. WHERE WOULD YOU EXPECT THE CASH RATE TO BE IN 12 MONTHS FROM NOW AND WHY?

TC: Judging by what the economic forecasters are saying, I predict the official cash rate will be sitting at approximately 4.75 per cent within 12 months: the RBA is widely expected to hike rates by an additional 100 basis points within the year. However, even if this does come to fruition, interest rates will continue to sit at historically low levels.

JZ: I’m not an economist so I will resist the temptation to predict a number for the cash rate in 12 months. But while I believe it will be higher than 4.00 per cent, the case for higher rates is not clear-cut. From the Reserve Bank’s perspective, the economy is in much better shape compared with 12 months ago, the resources boom is back in full swing, and the housing market is bubbling along – all convincing arguments for the Reserve Bank to keep nudging rates up.

But the big economies of the US, Europe and Japan continue to struggle; they are still stuck with low growth and falling inflation. Moreover, government capacity in these countries to further stimulate their economies is limited. These are arguments for the Reserve Bank not to tighten monetary policy. However, I think they will err on the side of caution and keep lifting rates to keep the inflation genie in the bottle.

AR: The cash rate will continue to move upwards towards the long term averages. How fast this will happen will depend on how the inflation rate compares to the RBA’s targets. Given this, I would suspect that we will see one to two 25 basis point rises before the end of the calendar year.

KC: Given the RBA’s latest rate increase to 4 per cent, there seems to be no doubt that rates are trending up; [however] it’s of course a guessing game to predict where they’ll end up in 12 months time.

I think the non-bank sector needs to be very focused on how we can improve our position in an environment of tightening monetary policy. Product innovation, which is more likely at the nimble, flexible end of the borrowing spectrum will be the key to not only surviving, but thriving over the next few years.

We have to look at where the funds will be accessed and at what cost? Also, what regulatory changes are on the way and how will they effect what we can offer borrowers? There are opportunities in every monetary environment and that’s something I continue to look at very closely.