One of Australia’s largest brokerages has reset its commercial terms with the banks as its CEO believes strong competition can drive broker commissions higher in the current environment.
The spotlight on broker remuneration, proliferated by the ASIC and Sedgwick reports, has driven high anxiety among the third-party community about how the future may look from a commission perspective.
Mortgage Choice has been consciously diversifying its revenue away from broker commissions over the last few years. Some of these strategies are now bearing fruit. The group’s financial planning business — launched as that industry was undergoing its own remuneration reform — delivered $2.2 million in profit over FY17, up by 26 per cent on the previous year.
Asset finance had been a more recent diversification play for Mortgage Choice. The division launched in July and appears to be performing well.
“Growing out our business, diversifying our revenue stream obviously diminishes the risk that we have if we were to have our revenue dependent on one line of business only,” Mortgage Choice CEO John Flavell said at a media briefing today (24 August). “That provides us with a degree of surety.”
However, the group’s core broking business is still very much its bread and butter and contributed 88.5 per cent of gross revenue in the 12 months to 30 June. The proportion of revenue from non-residential lending activities increased to 11.5 per cent over the period.
Asked whether the company was at risk if broker commissions were to change, Mr Flavell (a former GM of broker distribution at NAB) explained how the broker model is actually favourable for banks form a commercial perspective.
“If you actually look at the financial performance of mortgage broking and the positive contribution that it makes to our lending partners, you will find that the economic outcomes for the lenders typically, whether you’re looking on an ROE basis or a margin basis, add up quite favourably,” he said.
“Our experience is that we have a lot of tension in the market in terms of competitors who would like to have their products available for distribution through our network, and the trend in relation to commissions over this recent period has been that they have increased somewhat.”
Over FY17, Mortgage Choice received a total of $171.47 million in commission from lenders, split between upfront ($75.08 million) and trail ($96.39 million).
“We reset the commercial terms with a number of our significant lenders over the last 24 months, whereby our rates of commission have actually increased,” Mr Flavell said.
“The mortgage broking proposition in terms of delivering ROE from a lender’s perspective is very sound. Consumers continue to use mortgage brokers more than any other channel in terms of having their home loan needs met, and the competition and the number of lenders that would very much like to deal with us and come onto our platform, that doesn’t go away anytime soon.
“There is pressure in terms of commissions. We see it more in an upwards direction than anything else.”
Mortgage Choice brokers are paid the same rate of commission no matter which lender they place a deal with.
The company’s average upfront rate for FY17 was 0.6544 per cent while its average trail is predicted to be 17.5 basis points by June 2021 as its book matures.
Over the 12 months to 30 June, the group recorded its best ever settlement result of $12.3 billion.
[Related: ASIC to scrutinise broker mortgages]
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James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.
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