The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is long overdue. But will it work in favour of Australian consumers?
Its goal was to ensure better outcomes in the future as banks and financial institutions are forced to put their customers’ needs before an institution’s bottom lines and its executives’ pay packets.
While well intended, Hayne’s recommendations for proposed sweeping changes to mortgage broker remuneration may destroy the one channel that has kept the banks honest and delivered outstanding results to the customer.
A heavy-handed approach to broker remuneration will decimate mortgage lending competition – which has flourished as a result of a level playing field created by brokers. Low entry costs for smaller banks, non-banks and niche lenders have forced the banks to cut their margins in half since the late 1980s, with brokers an integral part of offering alternatives to the big banks and stimulating competition.
Should this competitive lending marketplace be reversed, Australians could see 2 to 3 per cent added to their mortgage repayments if history is anything to go by.
Borrowers clearly prefer brokers to a direct relationship with a bank when it comes to choosing a mortgage. Since the inception of the mortgage broking industry, millions of Australians have dumped a bank branch for a broker. And today, 60 percent of borrowers favour this channel when it comes to choosing a mortgage.
That is an astounding proportion of all borrowers, and brokers’ share of the mortgage lending market continues to grow.
When you look at the latest data, it is not hard to see why. The Consumer Access to Mortgages Report conducted by Momentum Intelligence in December evaluated the opinion of 5,800 borrowers to better understand the customer experience when using a broker.
The findings revealed that 96 per cent of mortgage broker customers were satisfied or very satisfied. What’s more, 95.8 percent would choose a mortgage broker for their next loan.
The message is clear: the mortgage broker channel has near-perfect customer loyalty, while only one in three direct customers plan to return to their bank.
But a cornerstone of relationship between brokers and their customer hinges on the value borrowers see in a “free” service.
Why is this proposition so important and why won’t borrowers pay a fee-for-service that they clearly value?
The answer is simple. Why would anyone willingly pay for something that’s always been free, particularly when they get great value out of the service? Borrowers know that brokers are paid a commission – and the Consumer Access to Mortgages Report showed almost 80 per cent, a huge majority, have absolutely no concern about this structure.
Just 3.5 percent of broker customers would be prepared to pay a fee that is equivalent to the average upfront broker commission of around $2,000, the reported indicated.
That signals a potentially catastrophic outcome for borrowers should commissions be removed.
Australian property is also expensive enough as it is. What’s more, stamp duty, legal fees, insurance, plus a host of other expenses will leave most borrowers little left in the kitty – and potentially make property out of reach for millions of Australians already struggling with affordability constraints. Is it any wonder they don’t want to fork out on broker fees as well?
Any decision that borrowers should be forced to hand over a fee-for-service that is currently free and they value – for their own good – is frankly an insult.
LISTEN: Alex Whitlock, director of Momentum Media, shares his insight into what the royal commission means for Australian borrowers and competition.
Alex Whitlock is a director at Momentum Media.
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