In its second background paper, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry highlights a “lack of data” on several aspects of the mortgage broking industry.
Compiled from public information, including that from The Adviser, the Some Features of the Australian Mortgage Broking Industry report outlines that the mortgage broking industry is “a key distribution channel for residential mortgage financing in Australia”, settling 55.7 per cent of all residential home loans in the September 2017 quarter (according to the MFAA).
Despite the initial hearing of the royal commission suggesting that up to 1 in 10 submissions related to brokers (a figure which has been disputed), the royal commission does not make any conclusions or recommendations regarding the third-party channel in the report.
It instead provides an overview of the sector based off publicly available information.
It states: “Both the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) have noted some contributions the mortgage broking industry has made to the Australian home loans market to date.
“The contributions noted include making it easier for borrowers to compare the costs and features of different loans and contributing to the increase in competition between lenders in the Australian mortgage market.”
Touching on a report prepared by EY in 2015, the report outlines that residential property investors and residential owner-occupiers make up over 75 per cent of the customers of mortgage brokers.
It adds that the total value of new loans placed by brokers has increased as a percentage of GDP since March 2013 but has remained relatively stable over recent quarters.
Using information from the MFAA and the Australian Bureau of Statistics (ABS), the royal commission found that loans placed by brokers in the March 2017 quarter was equivalent to around 2.7 per cent of nominal GDP (four quarters to March 2017), up from around 1.6 per cent in the March 2013 quarter.
In the year to March 2017, the value of the loans placed by brokers was equivalent to around 11 per cent of nominal GDP.
Top 25 brokerages
The royal commission also cites figures from The Adviser’s annual Top 25 Brokerages report, which ranks brokerages on a range of metrics.
Pulling from last year’s ranking, the royal commission highlighted that in the financial year 2016, the average loan size of The Adviser’s top 25 brokerages ranged from around $235,000 to around $719,000, while the number of loans per broker ranged from around 21 to around 329 loans.
The larger brokers in the top 25 had lower average loan sizes and loans settled per broker than others on the list.
Looking at broker commissions, the report outlines the structure of the current remuneration package (upfront and trail), but it states that there was “only limited public information on the value of commissions paid to mortgage aggregators and mortgage brokers by lenders”.
Indeed, it goes on to highlight that the draft report from the Productivity Commission into the Australian finance industry observed that information on commissions paid by (ADI) lenders over time appears “to be a black box for this industry”, and therefore outlines that the information on commissions is “only for illustrative purposes”.
It states: “Based on unpublished industry data, the Productivity Commission has charted the average upfront commission rates paid by lenders for the years 2002, 2007, 2012 and 2017, which supported its observation that ‘broker commission rates are currently slightly lower than prior to 2007’.
“According to the review conducted by ASIC, lenders paid approximately $1.42 billion in upfront commissions on $175 billion of home loans in 2015 (0.81 per cent of home loans) and $729 million on $98 billion of home loans in 2012 (0.74 per cent of home loans), representing an increase in commissions as a percentage of home loans between these years.”
Referring from ASIC’s remuneration review, it says that, in 2015, the average rate of upfront commission (based on data received by ASIC from their reviewed aggregators) paid by lenders to aggregators was 0.62 per cent, and the average rate of upfront commission passed on by aggregators to broker businesses was 0.54 per cent.
It also outlines that the MFAA has published information for the more recent period of October 2016 to March 2017, providing a figure of an estimated average gross upfront commission of $76,827 per broker per annum (prior to costs).
Noting that the Productivity Commission did not present any findings based on unpublished industry data, as it did for upfront commissions, it relied on ASIC and MFAA figures, with the most recent figures from the association showing that between October 2016 and March 2017, there was an estimated average gross trail commission of $56,579 per broker per annum (prior to costs).
Limited available data
The main theme of the report is that there is a lack of “publicly available information” on a range of data sets for brokers.
For example, the royal commission highlighted that detailed information on the number of mortgage brokers and aggregators over time is “limited”, while there is “no public information on the aggregate number of brokers operating under a franchise” nor could it find public information on the total number of mortgage aggregators owned by ADI lenders.
Other areas that the royal commission outlined were hard to quantify due to a lack of publicly available information. These included:
It is likely that the next round of public hearings, which will commence on Tuesday (13 March 2018) and will focus on home lending, will call on relevant stakeholders to provide more information on these matters.
An online form is available to assist people wishing to make submissions to the Royal Commission into Misconduct in the Financial Services Industry.
The form is available on the Public Submissions page.
[Related: Royal commission updates online form]
Broker-originated loans are refinanced at “more than double” ...
Introducing fees for service would cause a “major disruption”...
The Finance Brokers Association of Australia has told the Product...