INDUSTRY OUTLOOK - Viewpoint

Increased competition between the majors has left non-bank lenders out in the cold, while regulation has encouraged more brokers to consider charging a fee for service. In this quarterly roundtable, The Adviser tackles these issues plus other questions in the news

Key

IR: Ian Rakhit, Bankwest, head of specialist lending

DL: Doug Lee, Macquarie, head of mortgage sales

BO: Brendan O'Donnell, Liberty Network Services, managing director

FP: Frank Paratore, Ballast, general manager

SS: Steve Sampson, Provident Capital, head of distribution - lending

TS: Trevor Scott, PLAN, chief executive officer

DO YOU THINK THE PRICE WAR BETWEEN THE MAJORS WILL CONTINUE TO RAGE, OR CAN WE EXPECT OTHER LENDERS TO MAKE THEIR PRESENCE FELT?

BO: I think we will see the price war between the major lenders continue for a while but, due to the low single digit credit growth, pressure is mounting around costs. Non-bank lenders are re-emerging with sharper pricing but we know that a low rate is not the only draw card for customers when it comes to choosing a lender.

TS: The market is very competitive from a lender’s point of view. We are experiencing a slowdown in the home loan space in particular, with credit growth sitting at record lows. This extremely competitive environment is very good for borrowers, as there are some very attractive rates available. I think it is likely that we will see an increase in demand for refinancing in the coming months, as borrowers seek a better deal than the one they already have.

SS: The price war will continue for as long as the majors want to cannibalise each other. The recent price war on fixed rates is a step up from the variable rate price war as it means that the banks are now looking for longevity of a switching customer in the post-DEF market. After the DEF debacle I don’t want the government to intervene in anything to do with consumer finance. The market will work itself out and the shareholder voice of the majors will eventually ring through if the return on their investment is diminished by reduced pricing.

DL: What we are seeing is both a protection of and a grab for market share in a flat / declining home loan marketplace. Initially the pricing war was centred around discounts to the standard variable rates; however, we have seen in the past couple of weeks this has also moved to fixed rates. We are seeing the non-banks become quite competitive in the fixed rate space which augers well for providing a wider choice of lenders for brokers to recommend. At this time there is no need for government intervention; market forces are determining pricing and each lender has its own strategy in regards to remaining competitive. It is, however, important to note that pricing alone is not the full determinant of a product’s true cost and competitiveness.

MUCH HAS BEEN SAID ABOUT THE QUALIFICATIONS REQUIRED TO BECOME A MORTGAGE BROKER IN THE FUTURE. DO YOU BELIEVE REQUIRING HIGHER EDUCATION (I.E. A UNIVERSITY DEGREE) WOULD IMPROVE THE STANDARD OF MORTGAGE BROKERS OR WOULD THIS DETER NEW BLOOD?

FP: Would a greater level of education improve the standard of the broking industry? Maybe yes, maybe no. I don’t think anyone with an education is of a better standard than anyone else. That said, a university degree would force all brokers to be more serious about their profession. Would it deter people from entering the industry? I don’t think so. Instead, I believe it would encourage a different kind of person to enter the industry.

BO: I agree. There is always room to improve our knowledge but we need to make sure that we don’t introduce qualifications for qualifications’ sake. The industry has made significant progress and is now a professional industry - we need to stop talking about becoming a professional industry because we are already there! The fact that more robust qualifications are required to be a broker is in fact a positive, and will attract new talent to our industry.

TS: As far as I am concerned, a diploma in mortgage lending is the maximum level of qualification required for mortgage brokers. The introduction of NCCP has removed many of the brokers that could be seen as ‘lacking in professionalism’. The issue of new entrants is a serious one, and as an industry we need to investigate ways that we can encourage new entrants into the market. There are a number of businesses that provide excellent mentoring and coaching services for new brokers, and we should be supporting these wherever possible. New entrants in our market are the future of our business, so it is incumbent on all of us to do what we can to ensure our industry remains a very strong option for borrowers.

SS: The industry does not need tertiary-educated people to hold it together. One of the attractions of the industry is that it is a fairly simple industry and will attract good entrepreneurial, honest and clever young people providing that there are good mentoring and ‘on the job’ training programmes available. This, together with the current regulations would bode well for the industry without university qualified entrants.

A MAJORITY OF BROKERS BELIEVES NCCP HAS HAD A NEGATIVE IMPACT ON THEIR BUSINESS. HOW DO YOU THINK THE INDUSTRY HAS ADAPTED TO THE NEW REGULATIONS?

DL: Overall the industry has adapted well, despite the additional cost and time of compliance with NCCP. Like any new regulation it does take time to adjust and incorporate this compliance into normal day-to-day business activities. We need to be mindful that this regulation has the consumer in mind and therefore ultimately supports the broker proposition of being a professional within the mortgage industry with the consumer’s interest at heart.

SS: With change there will always be impact. No one really could be surprised that there would be more paperwork, compliance requirements etc. That would result in taking more time in interviewing clients, writing loans and managing loans. In the fullness of time this will be a very good thing for the industry as a whole.

FP: Agreed. I think regulation has been good for the industry. While all brokers have seen their workloads increase, only the part-timers are struggling to deal with the increased workload. Good brokers are not complaining, they are just getting on with business. Aggregators should be supporting their broker partners to ensure their compliance requirements are not too burdensome and don’t bite into their loan writing time. We support our brokers 110 per cent. We want to do whatever we can to help them in their business.

IR: I’d echo Frank’s comments and say brokers have absolutely seen their workload increase as a result of NCCP. But, the best brokers have embraced the legislative requirements and made them work for their business.

BO: It is still early days. Initial resistance comes with any change, but as expectations around what is required become clearer brokers will see and embrace the opportunities that exist – providing advice opens up a range of opportunities for brokers.

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

BO: Diversifying into a broader range of finance offerings – small business, self managed superannuation funds (SMSF) property investment, and insurance. Brokers who only focus on residential mortgages and who fail to diversify their customer base will struggle to increase their income.

FP: I absolutely agree. The greatest opportunities lie in refinancing, and investors – both domestic and international. Our dollar is doing well in comparison to the rest of the world and our property market remains very resilient, making it the perfect time to invest.

SS: In my opinion, I believe the refinance and, to some degree, the debt consolidation market are likely to be the most active. At Provident we are starting to see a trickle of applications for SME working capital. The SMEs are drastically under catered for by the banks so I believe there will be more opportunities in that market.

TS: Steve is spot on. There will definitely be renewed activity in the refinance sector as borrowers move to fix all or part of their loans to secure some of the very competitive deals that exist in the market today.

IR: Investors will continue to dominate the market moving forward. Professional investors that are not negatively geared realise that now is a very good time to buy. In addition, I think refinancing will continue to be strong.

WHAT IMPACT WOULD A RATE CHANGE HAVE ON THE CURRENT PROPERTY MARKET?

TS: Stability of interest rates is just one driver of activity in the mortgage market. If rates reduce over the coming months, as many are predicting, coupled with the oncoming of the annual spring increase in property sales, I believe we will see an increase in activity in the property market.

IR: A rate increase would definitely damage consumer confidence, but I don’t think rates are the only thing keeping buyers out of the market. Many factors are contributing to poor consumer confidence, namely the rising cost of living and problems abroad. I think a rate cut would be welcomed by consumers, though it would take a lot more than one rate cut to bring buyers back to the market.

SS: I agree. The market is now all about sentiment and until positive consumer sentiment returns the property market will remain subdued. Note also that the volatility of the equity markets hasn’t given the property market a boost either. ‘Cash is king’ and I feel that will not change for some considerable time.

FP: Any increase to the cash rate would be diabolical. There is no doubt that Australia is performing very strongly in comparison to the rest of the world. The problem is that what is keeping Australia healthy is the mining sector. If you look at our retail figures, they are lagging behind. So, any upwards movement would have a significant negative impact on Australians and buyer confidence.

THE INDUSTRY SEEMS SPLIT OVER THE PROS AND CONS OF CHARGING A CLIENT FEE. DOES FEE FOR SERVICE HAVE A FUTURE?

SS: I am a firm believer that the more effort that goes into a loan application the fairer the fee should be; if that is paid by the applicant to the broker to provide a solution so be it, but it needs to be fair. The danger is of course that the banks will have a great opportunity to reduce their brokerage fees once they get a ‘whiff’ that other income is being earned on residential loans, so I don’t think it will become an industry norm. Many brokers, particularly in the commercial world, make their income from mandating their customer and I say that is fair enough if they have either saved the client money or provided a solution that was not apparent to their customer.

FP: Steve is exactly right. A lot of brokers are already doing it, and doing it well. The brokers that charge a fee see value in their business. The broker proposition is vastly different to that of a bank and the sooner brokers understand this, the better the industry will be. Brokers should never underestimate their own value. Provided you value your service and you are a relationship-based broker, rather than transactional-based broker, then you should charge a fee. That said, I don’t think we will ever see all brokers make the move to fee for service. Some people can’t get their head around the idea and thus are better off not even trying to implement a fee.

IR: I don’t believe there is a future in fee for service. Brokers would be better off looking at charging a fee for their advice. Some brokers already do this very successfully and I think we will see others implement a similar system. That said, I don’t think we will ever see the whole industry move towards a fee for advice business model.

BO: Absolutely agree with Ian. Fee for service has no future but fee for advice does have a future. Brokers today are professionals and customers recognise this more and more. The challenge is making sure that customers receive value when dealing with brokers – which we know they do.

TS: Just as Ian and Brendan said, it is important to differentiate between a fee for service and a fee for advice. I am fully supportive of brokers charging a fee for advice. The majority of brokers are pivotal in providing impartial and independent advice to borrowers. The provision of accurate and relevant advice is even more imperative in a regulated environment, and the experience and knowledge of brokers matched with a well researched Client Needs Analysis has intrinsic value to a potential borrower. I think the borrowing community is ready to accept this. The broker proposition with access to a strong lending panel via an aggregator is far stronger than an institution offering a monoline solution.

DL: I think that a fee for service is some way off yet and there would be a number of scenarios that would need to be worked through. One such scenario is if a borrower can go direct to a retail lender and not pay a similar type of service fee, raising the question of whether brokers will truly have a level playing field? I think the debate will go on for some time yet, and this provides an opportunity for brokers to continually define their proposition around professionalism, service and choice.