The chairman of the Productivity Commission has said that while it may be in the interests of the bank and the broker to limit churn, it is not in the interests of the borrower.
Speaking at the Committee for Economic Development of Australia (CEDA) in Melbourne on Monday, Productivity Commission chairman Peter Harris reiterated some of the questions raised in the commission’s draft report into competition in the Australian financial system, which scrutinised broker remuneration and the purpose of trail commissions.
Despite ASIC finding last year that broker remuneration was generally sound and only required some minor changes to "improve" the structure (largely to do with soft dollar benefits), the productivity commission said it was “considering making a recommendation to the Australian government on the matter of trail commissions and commission clawbacks”.
The PC is also questioning whether consumers should pay brokers a fee for service.
Speaking on Monday, Mr Harris said: “Despite some recently announced industry changes to parts of the commission payment structure, commission earned by brokers remains far from aligned with the interests of the customer.
“Trailing commissions are an example of that. These are only paid while a customer remains with a loan. They are worth $1 billion per annum. There is nothing immaterial about them.
“The industry itself has said that trailing commissions are designed to reduce churn and manage customers on behalf of banks.
“Despite the hint to the contrary, we do actually understand quite well why it might be in a bank’s interest and a broker’s interest to jointly limit churn.
“But not the customer’s interest, who (the data is surprisingly unavailable, as noted earlier) is most probably paying for the service.”
He continued: “Given the unhappy experience with misaligned incentives in wealth management, being able to substantiate the assurance that a broker is acting in the customer’s best interest would seem to be pretty desirable today.”
He said that the commission would “prefer” that banks imposed this interest via contract rather than have the standard introduced via regulation. (However, the commission’s chairman added that as the commission has no power to recommend what banks do, it has instead proposed regulation in the draft report.)
“It would have been valuable to put the cost-benefit side by side”
Once again, the chair highlighted a data gap in the industry, stating that he believes the “default position among data holders in this industry is set against transparency”.
“[W]e were genuinely surprised to find that they either do not hold data at all on some important aspects of decision making, or for another reason could not supply them,” Mr Harris said, stating that “the cost of mortgage brokers is quite high”.
Mr Harris added that brokers cost $2,300 for the average loan of $369,000, plus a trailing commission of $665.
He said: “Other analysts have suggested higher numbers than these in high-priced locations, but we will stick with national averages.
“More than $2.4 billion is now paid annually for these services. Some in the broking industry want to know why there is suddenly attention being paid to commissions.
“The sum I just cited, as a large apparent addition to industry costs since the mid ’90s, by itself suggests a public analysis of why it is so large might be in order.”
He argued that the $2.4 billion figure “becomes problematic when it is also suggested that customers aren’t burdened by this as they don’t pay these costs”, adding that “anyone with a slight amount of common sense knows that somewhere in any product purchase it is only a customer or a shareholder who could be paying this charge, unless offsetting costs have been stripped out”.
Mr Harris continued: “Shareholders returns are pretty constant, so we would have liked to unpack that cost question a little, to see if the price was supported by cost savings. With the data provided by banks, this proved to be near impossible.
"For smaller banks, we were able to develop some estimates of the branch costs they would potentially face, without broker assistance. But we received insufficient information from most (not all) banks, and so could not create a clear picture.
“Thus, we can’t say whether there has been a net improvement in efficiency, even as a large sum in commissions has been added to industry costs. We have also shown in the report that brokers do produce slightly better rates for their clients than going in to the bank branch. But that benefit for consumers has been declining since the GFC. It would have been valuable to put the cost-benefit side by side.”
Mr Harris also took aim at vertical integration, suggesting that bank-owned aggregators control about 70 per cent of the mortgage broking market.
He added that in-house products or white label loans appear to “dominate disproportionately” the outcomes for borrowers who use bank-owned aggregators.
The PC chair noted that, in 2015, the Commonwealth Bank had 21 per cent overall market share in the broker channel but a 37 per cent market share via Aussie Home Loans.
However, while it has concerns about vertically integrated groups, the Productivity Commission said that forcing banks to divest of their broking businesses should be “a last resort”.
“Of course, if the necessary solutions prove commercially unpalatable, institutions themselves may then choose to divest,” Mr Harris said.
Many in the industry have spoken out against the Productivity Commission’s draft report, with some suggesting that the remuneration figures cited are “incorrect”, others stating that the recommendation to charge fees would be “anti-competitive”, and both broker associations calling out some findings of the report (which relied heavily on figures from CHOICE consumer group and UBS reports) as “limited”, “amateur” and — in some cases — “nonsense”.
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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