The clawback of broker commissions is “something to be concerned about”, the head of the Finance Brokers Association of Australia has told the Productivity Commission, highlighting the service and cost-benefit of brokers.
Speaking at a public hearing in Melbourne on Monday (5 March), the executive director of the Finance Brokers Association of Australia (FBAA), Peter White, told the Productivity Commission (PC) that he believes “unfair clawbacks [of upfront commission] need to go” as it is “commercially unfair” that brokers can lose their income for “doing [their] job for up to two years [due to things] that are outside of [their] control”.
Mr White told the commissioners that while he agreed that clawbacks may inhibit the movement of loans/borrowers between lenders, a broker’s duty of care to a client is “unfairly commercially challenged due to this, and this [therefore] must be removed to ensure best interests of the clients are always [put] first without the potential of commercial disruption”.
The PC chair, Peter Harris, told Mr White that the commission “could see that clawback was worse than trailing commission” and asked whether the PC “should be worried of clawback persisting as a preferred penalty from the banking side”.
In response, Mr White said: “In my personal view, I believe that clawback is something to be concerned about. I understand the rationale and why it was implemented; it came in when the Labor government banned exit fees and there is a whole history that sits behind that.
"But, at the end of the day, everybody gets paid to do a job. Once you’ve done your job, you can tick that box. Somebody should not then have the right to claim that back over two years, and I believe that is something to be concerned about.”
Fees for service “not viable”
Noting that the draft report from the PC highlights the commission is “considering making a recommendation to the Australian government on the matter of trail commissions and commission clawbacks”, Mr White argued that “trail does not restrict the movement to restructure or refinance a loan should such be a consideration in the best interest of the borrower [because] if trail stops with the current lender, it is then restarted with another”.
While he acknowledged that trail was first designed to reduce “inappropriate churn of portfolios”, in the years since, trail has been seen as a payment to “undertake actual work on behalf of the lender which would normally be done by branch staff and or head offices”.
These, Mr White said, included things such as:
Mr White added: “There is an inference that the role of a broker is to get a lower rate for consumers. This is not correct as brokers by law provide credit assistance, which does include potentially getting better interest rates, but it includes far more than that; it includes product suitability and various other components.”
When asked what the cost of the broker channel was compared to the direct channel, Mr White suggested that it was around half of the cost of the proprietary channel.
He told the commission: “The use of brokers evolved from a clear recognition that the value proposition of using a broker was more attractive than branches and staff.
“The proliferation of brokers has occurred because of the benefit derived by product issuers from an expanding broker network, and, implicitly, product issuers know that a broker distribution model is cheaper and more effective than staff and branches, which is why it continues to thrive.”
Touching on the commission’s draft recommendation that brokers could charge a fee for service, Mr White agreed with Connective’s Mark Haron in saying that the model was “not viable” as it would result in consumers “having to pay from their own pockets to intermediaries for the services that should be paid for by the bank”.
The FBAA executive director said: “It would mean intermediaries earning less, making the profession less viable and seeing many exit the industry, thus diminishing the influence they have on lender conduct (pricing and service levels), and direct channels will become more profitable. The consumer loses, every time.”
Focus on remuneration has “no end purpose”
Indeed, the head of the FBAA argued that “brokers increase competitive pressures, making all rates lower”.
“[W]ithout brokers, consumers would only have the 100 per cent conflicted direct channel option, which is inferior,” Mr White said.
“At worst, a conflicted broker is delivering the same result as a direct channel and at no additional cost to the consumer.”
As such, the FBAA executive director concluded that “the focus on broker remuneration seems to have no end purpose other than to disrupt the industry”.
“The PC suggests there is no transparency in broker fees, yet the commission disclosure requirements under the NCCP are extensive,” Mr White said.
“The finding also ignores the fact that without the presence of brokers, banks would be under no pressure to remain competitive or to be looking after existing clients.
“So, the focus on broker remuneration seems misplaced as broker remuneration is a supply-side cost.”
He continued: “There is no suggestion that broker remuneration is increasing rates paid by consumers or that changing broker remuneration will reduce rates to consumers. It will only result in increased direct channel conflict (bank branches) and increase product issuer profitability.”
Mr White revealed that the association will be issuing further information on the size of the broker market in a new Consumer Broker Index, which will show that as at April 2017, there were 26,037 consumer brokers and businesses in Australia.
The report will be released later this week.
Annie Kane is the editor of The Adviser magazine, Australia’s leading magazine for mortgage brokers. As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also the host of the Elite Broker podcast and regulator contributor to the Mortgage Business Uncut podcast.
Before joining The Adviser team at Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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