ASIC review: A broker’s perspective

We need to be very careful that the system that is under review for our industry doesn’t suffocate the very reason the system works in the first place. It’s a delicate process getting it right, and I appreciate that there are good people at work looking after people’s welfare.

It is very important to note that the following opinions are based on my experience and I would encourage other mortgage brokers to have their voice as well.

Why I transitioned into mortgage broking

Working for a major bank was a great training ground from which to learn about the inner workings of finance. I met some great people and was fortunate enough to work with business owners, learning the dynamics of how successful businesses operate. I am always grateful for that experience and opportunity gained through my banking years.

I remember trying to do the best job I could possible do, working 12-hour days and weekends just to keep up, and I remember being frustrated with higher targets every time I met my previous targets (bankers know what I am talking about).

But what I remember most was the instruction not to offer the client an investment loan that was more cost-effective when I could provide a more costly business facility. I remember having a massive moral conflict with this instruction, knowing that offering the most appropriate product and pricing that was in the best interests of the client ensured a deeper relationship with the client, plus the additional benefit of the client referring more clients to myself and therefore the bank.

In 2000 when the opportunity arrived to join the mortgage broking industry, I jumped at it. Finally there was a vehicle where I could provide people with financial choice, expertise and strategy. It was compelling and, better still, the fact my clients didn’t have to pay a fee for service for that advice was a large factor in my decision to join the industry.

The level of service and expertise that we provide the general market in the mortgage broking industry is usually only reserved for high net worth clients within the banking sector, so I loved that the whole consumer market (regardless of how much they were looking to borrow) could suddenly have access to this level of support and expertise.

Many bankers at that time had the courage to leave comfortable employment within the banking system and set up business in an unproven industry. We were passionate about what could be achieved for clients and we could see the vision for the future. It was, and still is, exciting.

We are only rewarded financially on our client’s success of settling a loan we have originated. If their loan settles, we are compensated by the lenders. If they fail to attain an approval and settlement, we are not paid.

In fact, the numbers from our industry overall make for interesting reading.

When you review the current average upfront commissions from mortgage brokers nationally, it averages out at approximately $82,000 per annum. We do have trailing commissions for the life of the loan, but this is very much required to cover ongoing support of our clients and cover significant business costs such as marketing, loan administration, rent, annual reviews, insurances, telephone bills, laptops, petrol, support staff etc.

In fact, if you are not a top 25 per cent performer in our industry, it can be more cost-effective to earn a wage in the bank.

But that is not what drives us!

We are driven by what we can contribute to people in creating brighter financial futures and making a difference in supporting their dreams of property ownership.

People favour using brokers

From the ground up, we have established a remarkable industry through word of mouth, and it’s evident by how people are taking out a mortgage. Fifty three per cent of all home loans are written through brokers, and this will increase because this is what clients are valuing – relationship, understanding, experience, strategy and choice.

People love the concept that the lenders pay for our expertise and not them. It is a model that works for the clients, lenders and finance professionals. If you introduce a fee-for-service model and reduce commissions to make it impossible for new people to enter our industry, plus test the viability of established businesses, then the whole DNA of why the service works so effectively for clients is destroyed. If clients need to pay for a service that has been a complimentary advisory for the past 20 years, all of a sudden the whole foundation of the industry will be rocked to its core.

I still can’t see the benefit of clients being charged a fee for service when it is not the best option for them. It does not make sense, and you create a model where clients don’t utilise the better option of a mortgage broker due to affordability issues around paying the fee for service. It actually then creates a market where only people with more financial means can afford our service, and this goes against the whole principal of accessibility to great service, expertise and choice to all people.

Our industry is maturing

As with any industry when you hit the tipping point in market traction, the spotlight increases. We actually should be very proud as an industry to get to this point. I remember our former business was very internally compliance-driven and created finance broking agreements that were relevant to the consumers in 2004 that provided full transparency. This were four years prior to the industry requiring such a document, and we saw it as best practice.

The response was appreciated by clients who wanted to have an understanding of how we were actually paid. Consistent feedback from clients was that they were happy we were being fairly paid by the lenders for the advice, choice and support we were providing them.

The clients' and brokers’ last concern was a $3 per week advantage for choosing one lender over another. When you take care of clients’ objectives, the slight difference in commission doesn’t enter the mind of either party because it is not relevant to what you are attempting to achieve.

I am a massive advocate for compliance and regulation to remove the cowboys from our industry. Like any industry, there is a very small minority of operators that need to be dealt with, and we have excellent governance now in place to do this more effectively.

Commission structure

I don’t buy the argument that bank margins are skinny when it comes to compensating mortgage brokers.

I will never forget 1999, which was my last year working for a major bank. I relationship-managed a portfolio of 120 high net worth clients, which generated over $5 million for the bank in gross revenue through various products and facilities. Not a bad revenue stream considering I was on $70,000 salary per annum at the time. Now, I know there are substantial infrastructure costs, but it is a very good return.

I am most certain the mortgage broking channel is a very profitable vehicle to the banks, so our remuneration must continue to be fair.

The banks have worked hard with aggregators in systemising our industry and providing support so we can deliver our services to the market, and we obviously want this to continue, so credit where credit is due (no pun intended).

The remuneration solution

Every lender is to pay the exact same commission split to brokers across the board for every product – 0.70 per cent (plus GST) upfront and 0.20 per cent (plus GST) ongoing trail of the total loan amount.

Furthermore, lenders should scrap any bonus commissions and spotter’s fees, and have the same commission rate for non-conforming applications.

Fairer clawback arrangements should also be introduced – 100 per cent clawback for the first six months, and then 40 per cent for up to two years.

By setting all upfront and trail commission payments exactly the same across all financial institutions – for all loan products, for conforming and non-conforming loans – minimises any conflict of interest. Even though the difference in commission is nominal, it disempowers any external party that may want to make it a bigger issue than it actually is.

With every lender paying the same level of commission, the focus then turns purely to quality service from the lender to the broker and client to attract business.

This matches my view that every lender should only have three products that have the same interest rates across all lenders (but this will never happen):

• A basic home/investment loan
• A home/investment loan with offset
• A three-year fixed rate home/investment loan

I know it is out there, but if lenders only had three products available to the market and they were all at the same interest rate, then all of the effort would be placed into improving the client experience, improving turnaround times and deepening relationships with clients and brokers. I know this is far-fetched, but you can understand my intention to create competition through quality of service and client experience as the basis of winning business – not just price. This would be amazing to see happen and a real game changer.

Why 0.20 per cent trail?

We need additional margin in our industry to hire more staff to assist further improvement and growth. There are increased expenses to cover training, quality control and compliance processes, not to mention the increased general expenses of running a business.

Improved clawback criteria

The clawback criteria need to be adjusted since there are occasional circumstances that require a person to sell or refinance in the course of standard dealings. To ensure the best commercial outcome is achieved for all parties concerned, a 100 per cent clawback over six months is fair, and then 40 per cent clawback for up to two years is more commercial across the board. Under the current arrangements of 100 per cent clawback for one year and then up to 50 per cent for up to two years (and this can vary from lender to lender), it can be frustrating behind the scenes when acting in the best interests of the clients, only to sustain a significant financial loss to the business.

A good example of fair compensation is the real estate industry. Let’s compare the remuneration of an agent selling the same property that a broker finances:

• The property is worth $500,000 and reselling due to circumstances within a calendar year.
• The mortgage broker, with an upfront commission rate of 0.66 and a trail commission rate of 0.15 per cent, receives $3,300 upfront and $687.50 in trail for 11 months. However, with 100 per cent clawback of upfront on sale, the total commission that the broker receives would be $687.50.
• The real estate agent, with a commission rate of 2.75 per cent, receives $13,750 initially, and then another $13,750 if the property is re-sold in 12 months. Therefore, the total commission that the agent receives would be $27,500.
• Even if the property is re-sold and the loan is paid out in full after three years, and there is no clawback, the mortgage broker will earn $5,550 in total revenues compared to the real estate agent, who will earn $27,500.

My point here is to highlight the significant difference and risk a mortgage broker is exposed to by providing great value to the client.

I trust this has been some food for thought.