There’s expectedly been a lot of chatter about the recent ASIC inquiry into the mortgage broking industry.
This information gathering process is geared to provide an overview of what’s currently happening in the industry through extensive data collection from lenders, aggregators and a select number of brokers. The findings (which exclude recommendations) are due to be submitted to government for review to by the year’s end.
A core objective of the investigation is to ensure that consumer interests are aligned with the financial services industry infrastructure. However, the fear within the industry is that the inquiry is eluding that somehow the consumer is going to be better off by overhauling the current system. To the contrary, I believe it will highlight the strengths of the existing model and spotlight the cornerstone of the industry: the power of the broker/ client relationship, which in turn is based on the fundamentals of choice.
A core foundation of choice aligns with the decision-making process: an awareness of needs and the ability to review alternatives (and corresponding risk), prior to the ultimate decision. From choice stems stability and confidence. Impartiality is empowering and culturally fostered in our DNA. We seek independence, trust 1:1 relationships and typically have an innate wariness of institutions. It’s no surprise then that brokers have increasingly become consumer’s go-to resource when choosing how to financially acquire, maintain and leverage their most important asset. This relationship is based on support, empowerment, trust and guidance.
One fear is that the inquiry may trigger an overhaul of the current upfront and trail commission structure and it being replaced by a fee-for-service model similar to what has occurred within the financial planning industry. If this was to occur, in my opinion, it will inevitably result in the erosion of choice. This will create confusion at best. In real terms, it’s a loss. It will cause major disruption to a stable distribution network that will undoubtedly have a profoundly negative affect on consumers and the mortgage industry alike.
Collectively with the NCCP, consumer interests have never been more aligned with the mortgage broking industry. The expectation of sustainable customer-service, complete transparency and professional protocol is at an all-time high. This is validated by the growth and evolution of the broking industry.
Currently, whether a consumer goes to a bank or a broker, the costs and fees associated with the loan are the same. This places the differing distribution channels within the mortgage industry on an equal footing, and so encourages healthy market competition and encourages the broker to focus on the consumer’s needs.
Conversely, a fee-for-service model will push consumers to either pay more for a broker’s involvement or do their own due diligence and subsequently be over-exposed to largely incomparable information that they’re arguably unqualified to interpret. In short, we know how to play to our strengths. For the majority of consumers the loan selection and establishment process isn’t one of them.
With the deterrent of a fee structure, consumers will understandably bypass the broker channel and be driven to engage directly with banks and thereby may miss a complete understanding of what options were available. A subset of the fee-for-service discussion is that perhaps only trails should be removed. Again this will leave consumers worse off. Firstly, because of brokers potentially needing to introduce a fee to compensate their otherwise lost revenue makes choice, as discussed above, more expensive. Secondly, the upfront weighting of transactions promotes churn and will encourage the industry to look at deals more as one-off transactions. Alternatively, if the upfront payment is complimented by an ongoing trail, as it is now, it prioritises an ongoing relationship, which is in the consumer’s interests.
The real question therefore becomes: what model is going to support the consumer and encourage a healthy, stable environment? Like most things, it’s all about getting balance and finding the sweet spot. A level playing field between the differing distribution channels is clearly desirable, and then within the mortgage broking industry an equal mixture of upfront and trail balances a consumer’s short-term and long-term interests.
The upshot is this:
• We’re all mutually focused on the consumer being in a position that they ‘win.’ This equates to them being given the choice of a number of products for consideration that can best meet their individual needs, with the corresponding council and guidance as best suits their objectives.
• A regulatory investigation always flushes out industry practices. This in turn provides an opportunity for astute, transparent and relationship-driven brokers to continue to be rewarded for applying their industry knowledge and customer-service skills to benefit the individual objectives of their clients.
• The current model is clearly working as evidenced with the consistent industry growth and evolution of the broker/ client relationship. If brokers were to derive no income from ongoing commissions, it will adversely disrupt the industry.
• Consumers benefit from market efficiency, healthy competition and a stable distribution networks.
[Related: ASIC review: a broker's perspective]
Nick Young is a results-driven specialist who has more than 20 years’ experience in the mortgage broking industry, and now heads Trail Homes: Australia’s most established and longest serving trail book purchaser.
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