Aggregator takes aim at PC report

Fees for service could “kill” broking industry

In its response to the PC’s information surrounding the introduction of a “fees for service” model for the broking industry, Connective suggested that the “commission structure for mortgage brokers remain as is”.

The aggregator claimed that such a model could “kill the industry” and noted that it would inhibit competition by benefitting banks with branches and disadvantaging customers that cannot afford to pay a fee.

“Moving to a ‘consumer pay fee for service’ structure would severely damage the mortgage broking industry, if not kill the industry,” Connective noted.

“It is critical that the focus be on rewarding behaviour which drives positive consumer outcomes, as opposed to shrinking the funding available to pay mortgage brokers for their efforts.”

Trail commission is critical

The aggregator also stated that it “strongly disagrees” with the suggestion that trail commission creates “perverse incentives” for brokers and limits switching.

Connective stressed that brokers are paid trail commission to ensure that borrowers are serviced throughout the term of their loan, claiming that it expects its brokers to contact their clients at least once a year.

“Trail commission is critical in ensuring that mortgage brokers continue to provide this invaluable assistance during the life of the home loan,” the aggregator stated.

Further, Connective pointed to foreign countries where trail is not paid to brokers, stating that in such countries, there are no clawbacks and upfront commissions are much higher.

“In other countries where mortgage brokers only receive an upfront commission and no trail, the quantum of upfront commission is much higher than in Australia (upfront commissions in Canada range from 0.90 per cent to 1.40 per cent with no clawbacks),” its submission reads.

Duty of care obligations redundant

Connective also stated its opposition to a duty of care obligation, noting that provisions are already in place to ensure that brokers work in a customer’s best interest.

“[We] do not believe that such a duty is required considering the various laws and regulations, including responsible lending obligations, mortgage brokers are already subject to.”

It also noted that reforms from the Combined Industry Forum (CIF) would make such obligations, as well as the PC’s call for increased broker disclosure, redundant.

Broker impact on pricing determinations

Connective was critical of the draft finding that loans originated by brokers “have only slightly lower interest rates than those originated through direct channels”.

The aggregator urged the PC to further investigate before reaching conclusions that undersell the value of brokers, which it noted should not be solely linked to a broker’s ability to negotiate a cheaper interest rate.

Connective also stated that the PC failed to take into consideration the difference between customers that use brokers and those that use the direct channel.

“From our perspective, [the finding] fails to appreciate that consumers who use mortgage brokers are generally different from those that go direct to branch and that such factors may explain why this may be the case,” the submission reads.

Branches costlier than brokers

Noting that half of Australia’s home loan providers were unable to provide evidence on the costs and benefits of using brokers to source home loans rather than branches, Connective highlighted the role that brokers play in reducing lender costs and enhancing competition from smaller lenders.

For example, it stated that smaller lenders would, on average, need to have an additional 118 branches each to maintain their current market share in the home loan market.

Connective also warned the PC of any bias in its report, particularly in relation to the statement that “lenders have spent large amounts of money [to] remunerat[e] brokers”.

“[T]his would indicate that the Productivity Commission is of the view that mortgage brokers are remunerated too much,” the aggregator said.

“Without any evidence that an effort has been made to appreciate the time and effort mortgage brokers expend in servicing their consumer, and how that consumer values the mortgage broker, it is concerning that a value judgement is being made as to what a mortgage broker’s service is actually worth.”

To the same end, the aggregator highlighted that the report pulls from UBS’s publications on brokers “without independent investigation how valid such assertions are in the first place”.

The aggregator concluded: “From Connective’s perspective, we believe the current regulatory framework applicable to the industry supported by the reforms proposed by CIF are sufficient to ensure mortgage brokers provide their customers with good consumer outcomes and that healthy competition is maintained within the home loan market.”