INDUSTRY OUTLOOK - Viewpoint

The implementation of licensing could push the mortgage broking industry towards introducing a fee for advice. The Adviser’s quarterly roundtable tackles this and other questions currently making news

Key

SC: Stephen Craig - AMP, Head of sales and marketing

KR: Kym Rampal - Loankit, Chief executive officer

DH: David Holmes - Pepper, Chief operating officer

MS: Melos Sulicich -RAMS, Chief executive officer

SM: Stephen Moore - Choice Aggregation Services, Chief executive officer

CD: Cathy Dimarchos - Sintex, General manager

NCCP REGULATION IS IN FORCE, BUT DID THE BROKING INDUSTRY HIT THE GROUND RUNNING AND ARE BROKERS MEETING THE NEW REQUIREMENTS?

SC: I think the broking industry as a whole has done a good job in getting ready for the National Consumer Credit Protection Act (NCCP) as far as the administrative processes around licensing are concerned. What’s important now is that a prudent approach is taken to developing the underlying business processes required for brokers to comply. The outcome will be shown in time as they are tested through compliance programs and audits. As with all new regulation, it takes time to become familiar with it and embed it into your business, but I certainly think it’s a case of so far so good for brokers.

CD: I think for the first time in our industry we have had guidelines set on a national level. This is great, as there is one voice and one message – to some extent – making it easier for all concerned to plan ahead and get things done. The positive here is that even if they are not ready, they have the ability to work through the specific details and get there.

MS: I agree there is still a long way to go and the requirements will evolve over time. It’s important to keep up to date and be ready to meet the new requirements as they are introduced.

DH: Preparation throughout the industry has been good, particularly with major aggregation groups providing training and information to their broker partners over many months in the lead up to 1 January [2011]. They have continued to assist their broker bases throughout the process. As with all major legislative changes, there will be teething problems in the early months while the industry adapts. Brokers, particularly since the global financial crisis, have become more professional, making the legislative changes easier to integrate into their workflow.

KR: While I agree that many brokers have done a good job so far in adapting to the changes, I also think many haven’t. Judging by the discussions on traditional and social media websites and around the traps, there is still a significant amount of confusion about exactly what restrictions and opportunities the new laws will bring. This is where credit representatives who are partnered with a savvy aggregation operation will benefit. They can spend a lot less time worrying and more time making a smooth transition, allowing them to concentrate on generating business.

FEE FOR SERVICE: IS IT THE FUTURE, OR THE BEGINNING OF THE END FOR THE BROKING INDUSTRY?

DH: Fee for service will prove difficult for the broker industry in an environment dominated by the major banks. Consumers with little choice other than one of the big four or their subsidiaries may choose not to pay a broker fee and do some preliminary investigations via the web, then go to the bank directly. Banks will inevitably exploit the fact that their service is free. To make a fee for service worthwhile in the eyes of the consumer, there will need to be a very clear value-add. Brokers will need to be clear as to how the service they provide to clients is better than going direct [to the bank].

KR: I think it is inevitable that our industry will need to charge a fee for advice, given the value proposition we are providing in assessing client needs. However, this fee should be completely independent of lender commissions and should in no way diminish the commission we currently earn from lenders. The lenders do not pay us a commission to analyse a client’s needs; they pay us for introducing clients and processing the loan application including pre-whetting clients to ascertain their suitability according to the lender’s requirements, electronically lodging the application, packaging the application and appropriate supporting docs to reduce costly lender processing.

SM: I believe there’s good scope for brokers to expand their offering and strengthen revenue through charging a fee. Brokers receive an upfront and trail commission from lenders for setting up, executing a loan and providing services around that particular loan. However, I believe the value a broker provides is far greater than just the transaction. We know that the ‘advice’ brokers provide to customers is valuable and can make a real difference to their overall financial position. Whether it be setting up the right loan structures, ownership, or a plan to accelerate loan repayments, many customers are happy to pay for this advice.

CD: Fee for service is certainly something to embrace. Everyone in our industry is here because they want to create a business for themselves and having a fee for service implemented is making things transparent to all involved. It shouldn’t be looked at as a negative, but a way in which we are seen as professionals. Let’s face it: the consumer can walk through the door of a bank, but they don’t.

COMPETITION AMONG LENDERS ATTRACTED CONSIDERABLE INDUSTRY COMMENT TOWARDS THE END OF 2010. HAS THE SITUATION CHANGED AND IS THERE REALLY A NEED FOR GOVERNMENT INTERVENTION?

SC: As a recognised second-tier lender, AMP Bank is very supportive of government initiatives to increase competition and we welcome this. The market we play in remains highly competitive, but dominated by a few major players, and it’s the size and scale of those that we compete with. I think we’ll see the smaller players continue to challenge the majors for market share.

MS: The Australian banking sector is highly competitive and already highly regulated. It is also strong and stable. There is a trade-off between competition and stability, and getting that balance right is crucial. Healthy and stable competition is not just about the sheer number of participants in a market, nor is it simply about price. Customers make choices based on a range of factors, including service propositions, product features and packaging, level of advice offered, customer support, local accessibility, online services and differences in relationship management. Most mortgage providers have different marketing approaches, and it has become increasingly clear to us that they attract different types of customer. This helps to keep our industry competitive and provides significant choice for Australians.

SM: Any increase in competition is great from a broker perspective. Irrespective of views on the government’s positioning on banking competition, the upshot is heightened consumer awareness and greater choice for customers and, as a result, an increased need for the specialised services offered by brokers. Choice of lender is key to a robust broker market and I see good scope for second tier lenders and non banks in the year ahead. There are some excellent alternatives to the majors right now, and I see this continuing throughout this year.

DH: The situation has not really improved. Any reduction of business volumes for the big four banks has been replaced by an increase in volumes for one of their subsidiaries. Non-bank lenders are still finding it very hard to compete due to the cost of funds. Until the improving securitisation markets open up further, it is hard to see competition improve in the short term. In the longer term, as access to securitisation improves, then competition will improve.

KR: We have noticed some good specials coming out recently and a little more product innovation, but we still have some way to go before you could say there is a healthy amount of competition from more than a few large and small lenders. The government still needs to find ways to better support the smaller lenders in sourcing competitively priced funding. Exit fees are not the real issue and the industry knows this.

INTEREST RATES APPEAR STABLE FOR NOW, BUT WHAT IMPACT WOULD FURTHER RATE RISES HAVE ON THE PROPERTY MARKET SHOULD THEY BE INTRODUCED LATER THIS YEAR?

SC: Any upward movement in interest rates will have the same impact it usually does: it will put pressure on those who are currently stretched. There is always a portion of the population that is affected every time rates move, and any rapid upward movement in rates exacerbates this. I don’t see a few rate rises as having much of an impact; people will adjust their budget accordingly, based on their borrowing capacity. In the investment sector the decision will be financially based, and as long as rents move in line with any rise in holding costs, then I think the fundamentals are sound. Investors will look to the long term and accept the market position.

KR: Any rate rise will result in some potential buyers cancelling, delaying or revisiting their purchase intentions – that is, buying a property at a lower price than planned initially. However, we would need a large number of rises to see a noticeably negative effect on the housing finance sector. With rents rising, rental vacancy rates being squeezed, a serious overall housing undersupply, strong employment, etc etc, there are plenty of opportunities for knowledgeable buyers, both owner occupiers and investors alike. If we do see a number of rises, say four or more in quick succession, that’s when the market will start to feel weight on its shoulders.

CD: It is inevitable that rates will rise. Australians have become better financiers and while they may not like the rate rises they do mostly plan for them. While our current market is in a generally flat place, there is still confidence and steady movement and the energy is positive. People will become more prudent in their choices and this has to be seen as a positive.

SM: Economic commentators are factoring in some hikes to the cash rate later this year. When it comes to potential rate increases, I believe the onus is on brokers to communicate with their clients on how rate increases may impact their ability to pay the mortgage. This includes, in some cases, better structuring of their finances and ensuring a buffer to protect against any rising rates.

MS: As mortgages can be the biggest monthly expense for many Australians, any interest rate increase can place significant financial pressure on household budgets. However, interest rates are not the only factor that influences the property market. There are many issues at play, including property supply, property prices, rental accommodation availability and accessibility, unemployment rates and the cost of living.

WHERE DO THE GREATEST BUSINESS OPPORTUNITIES FOR BROKERS LIE IN THE MONTHS AHEAD, AND WHICH MARKET SEGMENTS ARE LIKELY TO BE MOST ACTIVE?

SC: I think there are opportunities for brokers in every segment, but it will be up to each broker to develop a clear plan for targeting their chosen segment and to demonstrate how they can add value. It’s important then that they build and execute a clear marketing plan to drive business from that segment. Borrowers go online to look for information and to do their research. However, considering the complexity in the market and the range of products available, brokers are in the unique position of being able to bring clarity to the borrower around product while also providing the right mortgage advice. I think borrowers need this, and they still want to see someone face-to-face.

CD: Refinancing on the whole is the key to building relationships and sustaining business. There will still be activity in the investor market; however, I believe that the consumer has learnt a great deal in recent times and perhaps where they use to be complacent about staying or leaving their mortgage provider and finding out what options are available, they will make a concerted effort in researching alternatives, taking into account all product benefits rather than just a headline rate or choosing to go with someone because that’s who mum and dad went with.

DH: The self employed continue to form a growing segment in Australia as the economy becomes more flexible. During the GFC and in the period since, small business owners have been the forgotten segment. A tighter credit environment means their access to funds is now very restricted, and often they do not know who to approach for advice. Brokers, with their expertise in lending – both residential and commercial – can assist this under-serviced segment to obtain funds to grow their businesses. These customers will have many future needs, such as insurance and leasing which means they will be a valuable addition to any broker’s client base.

SM: There are opportunities in all markets right now depending on where you’re located and your client and prospecting base. However considering the current rate environment, heightened media attention to bank competition and consumers continuing to take a cautious approach to managing their money, we believe the best current opportunity is for refinancing. Focus on what you can control. Reviewing your existing customers can not only identify refinance opportunities, debt consolidation, restructures etc, it also provides opportunity to revisit their broader financial needs and reinforce their CVP.