Competition would decrease in the Australian financial system if consumers were forced to pay brokers a fee, the director of Connective has warned.
The Productivity Commission earlier this month released a 640-page draft report into competition in the Australian financial system, in which it posed the question of whether consumers should pay service fees to brokers to ensure their interests are being served without any conflicting commercial influence.
The idea, however, has been met with criticism, with Connective director Mark Haron saying that if brokers charged a fee for service, the Australian broker population would decline significantly, which, in turn, would negatively impact the non-major banks and non-banks that depend on brokers for business.
“The size and significance of the broker network is a really key thing to making lenders and the home loan market much more competitive,” Mr Haron said. “The amount of business done by brokers to non-banks has significantly increased. Those non-banks would struggle to operate in a market if there weren’t brokers out there selling and promoting their loans.”
The major banks — which already control more than 80 per cent of all owner-occupied housing loans and 85 per cent of investor housing loans, according to the Australian Prudential Regulation Authority — would therefore gain additional market share if consumers chose to go directly to banks for their loans in order to avoid paying broker fees, the director said.
Mr Haron continued: “If a customer can go into a bank branch and get the loan at [a particular] price and not pay a fee, but they go to a broker and have to pay a fee, that’s completely out of whack. Who would benefit from that? All of the major banks that already have branch networks, so we would see less competition.”
Fees would “kill the broking industry”
Madd Loans director George Samios communicated a similar sentiment, saying that if consumers were charged for broker advice, it would “kill the broking industry”.
“If you kill our industry, the banks will not be the competitors; they will be the dictators. If the banks have no competition, then a consumer will not be able to get a good interest rate because the banks will have a complete monopoly on the Australian market,” Mr Samios told The Adviser.
The other problem with consumers paying broker fees, according to Mr Haron, is that financial advice will become less accessible to customers who need it the most, such as first home buyers.
“They’re the ones that can least afford to pay a fee. They’d be forced to go direct to banks, and unless they were going to shop around at a thousand different banks (which is highly unlikely because it’s quite a lengthy process), it’s not going to benefit competition at all,” Mr Haron said.
“Then you’ve got your high-net-worth individuals who can probably afford to pay it, but are extremely time-poor, so if they decide to not pay the fee and just shop around, they’ll likely just get lazy and go back to their usual bank. The brokers would do that for them at no additional cost.”
Mr Haron also noted that, by managing home loan applications, brokers actually reduce the workload for banks.
“[Brokers are doing] the work that the banks would have to do themselves, so it’s only fair that the brokers get remunerated by the banks,” the Connective director said.
Mr Samios, who previously worked at Bankwest, additionally noted that the banks do not conduct yearly follow-ups with their existing home loan customers.
“That’s the whole reason we get paid trail. It’s to review our clients every year,” Mr Samios said. “When I worked in a bank, there was no such thing as ‘review your client’. They don’t ring up your client and say, ‘Hey, I just want to reprice your loan and save you money’.
“The banks are only interested in generating more business. They train their staff in hitting new business targets, not in looking after existing clients. Mortgage brokers are the opposite. We want to look after you for your whole life. Every year, we’re going to sit down with you, go through your goals and make suggestions that are in line with your goals.”
The Madd Loans director also described mortgage brokers as the “Ubers” of the industry — disrupting the industry to ensure all parties benefit from a better deal.
“We keep the banks honest. If a bank is not being honest, a mortgage broker will not support them. If they rip off our clients (and they’re our clients, they’re not the banks’ clients), we will not support that bank,” Mr Samios said.
“We are more than 55 per cent of the market, so they need us supporting them.”
The discussion around broker remuneration has heated up following the release of the Productivity Commission’s draft report, with several members of the industry reiterating the benefit of the current remuneration structure and the fact that ASIC’s review of broker remuneration found that no substantial changes were needed.
Speaking about the benefits of trail commission after the Productivity Commission suggested it could seek to remove it, FBAA executive director Peter White said: “It is widely known and repeatedly commented on in the media, and to regulators and government, that trail commission is paid for multiple reasons that all support good consumer outcomes.”
Mr White emphasised that it is partly to minimise “inappropriate churn” of loan portfolios that may not be in the borrowers’ best interests, but also for the broker to service any queries from the borrower.
“Brokers already review all the loans within their portfolio annually to ensure their loans have not become unsuitable for the borrower due to any changes in their personal circumstances,” the executive chairman said.
“It’s an ongoing job that lenders would not usually do.”
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