Mortgage brokers in Australia are among the lowest paid in the world, as new research from the FBAA and ASIC reveal that home loan brokers in other countries are not subject to clawbacks and generally have higher upfront commission.
In ASIC’s Review of mortgage broker remuneration, which was released last month for public consultation, the report detailed some of the remuneration structures of mortgage brokers overseas.
Since the release of the report, the Finance Brokers Association of Australia (FBAA) has released its Global Research Paper (compiled with the assistance of David Carson, regulatory compliance specialist at Compliance One Pty Ltd), which was submitted to the Minister for Revenue and Financial Services Kelly O’Dwyer in January as part of the industry association’s input into the remuneration review.
The report was intended to help make the case that the current remuneration structures in Australia (upfront and trail) are “fair, have no adverse impact on the market and compare favourably to international marketplaces”.
While the report suggests that brokers are among the lowest paid in the world compared to brokers from other, developed countries, the FBAA stated that “making changes to the current model will have significant consequences, many of which could be unintended or unanticipated”.
However, the FBAA research paper does highlight that – of the countries evaluated – only Australia had commission clawbacks.
A number of the findings in the FBAA’s research paper reflect findings later published in ASIC’s remuneration report.
Speaking to The Adviser, FBAA executive director Peter White said: “Our research paper… showed that brokers in Australia are amongst the lowest paid in the world. We're the only ones in the world that deal with clawbacks. We are already behind the eight ball on a global scale.
“I think it is a very inappropriate place for government and regulators to be sitting to be dictating as to how much people can earn.”
In the report, ASIC noted that UK mortgage brokers are paid either via upfront commission from the lender, a fee for service from the consumer, or a combination of both.
While ASIC noted that the typical upfront commission amount in the UK is lower than in Australia (at around 0.4 per cent of the loan value) it found that fees for service of between £200-£500 ($329-$824) have become more common, and are often paid “together with an upfront commission paid by the lender”. However, unlike Australia, there are no trail commissions.
The FBAA research paper highlighted that UK mortgage brokers are also largely responsible for writing life insurance, and therefore it can be assumed that they receive a larger income than from just mortgages alone.
Looking at the Netherlands, the ASIC report detailed that the most common remuneration structure currently is an upfront flat fee of around €2,000-€2,500 ($2,806-$3,508).
However, it details that not only are mortgages sold with life insurance, but also principal and interest home loans have traditionally been allowed to have LVRs in excess of 100 per cent.
Interestingly, the ASIC report noted that since the Netherlands banned broker commissions, the channel’s market share dropped from around 50 per cent to 45 per cent.
Brokers operating in Australia’s nearest neighbour are paid either an upfront commission only or a combination of upfront and trail commissions (upfront-and-trail model). Commissions in the upfront-only model are typically paid at a higher rate (e.g. one major lender pays 0.85 per cent of the loan amount), whereas commission rates in the upfront-and-trail model appear to be similar to those paid in Australia.
However, unlike Australian brokers, mortgage writers in New Zealand are not subject to clawbacks, according to the FBAA research.
The FBAA paper goes on to highlight remuneration structures of brokers in Canada, the USA and South Africa. It found that while none of these countries pay a trail (which is unique to Australia), the all receive a larger proportion of upfront commission.
For example, Canadian brokers receive an average upfront of 1 per cent, South Africans an average of 1.4 per cent, while Americans receive the largest up front of any other country evaluated – with an upfront of between 1 and 2 per cent.
The FBAA noted that when additional disclosure requirements were introduced for brokers in Canada, it caused “more consumer confusion”, as “the mere fact of disclosing something leads consumers to believe the information must be important”, which in turn causes some consumers to “focus on broker remuneration ahead of other, more significant, factors”.
Mr White explained: “Consumers do not understand whether the remuneration is built into the rate or is being paid on top. They erroneously conclude that the payment to the broker affects their rate.”
Writing to the Minister in January, FBAA executive director Peter White said: “This paper compares Australian mortgage broker remuneration with the remuneration structures in six main international regions. It is the product of extensive inquiries undertaken by FBAA representatives involving face-to-face meetings with representatives from industry bodies, international bankers, key stakeholders and industry experts, as well as telephone conferencing with representatives in South Africa…
“Remuneration structures in Australia are fair, have no adverse impact on the market and compare favourably to international marketplaces. Making changes to the current model will have significant consequences, many of which could be unintended or unanticipated.”
According to Mr White, reducing commissions paid to home loan brokers would:
He said: “International experience shows that changing trail commissions leads to loan churn (if industry is only remunerated per transaction then it will move to a more transactional model). Any reduction in remuneration levels will likely lead to an increase in the sales of insurance and other products to offset income losses. Australia is already subject to more prescriptive regulation than its international counterparts.”
“Any fundamental changes to commissions will potentially destroy competition in the lending market,” Mr White said, adding: “Fundamental changes to commissions are likely to lead to increases in home loan interest rates and related fees, and once issuers have less competition there will be nothing to hold them to account.”
As such, the FBAA told Ms O’Dwyer that the association “strongly recommends leaving base-line broker commissions (upfront and trails) as they are. In principle, this amounts to approximately 0.65 per cent upfront, and 0.15 per cent trailing income on the amortised loan balance.
However, it recommended that “a number of opaque marketplace practices” be looked at.
The FBAA concluded: “Mortgage brokers arrange more than 50 per cent of home loans in Australia. They are vital to empowering Australian consumers to make informed choices about the single biggest credit product they will acquire in their lifetimes.”
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