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Remuneration reform to cost Mortgage Choice $30m

by Reporter12 minute read
Mortgage Choice $30m, cash, dollars, Australian dollar, money

An increase in the share of trail commission paid to its brokers is expected to cost Mortgage Choice approximately $30 million, according to CEO Susan Mitchell.

Ms Mitchell told investors at a briefing on Thursday (12 July) that Mortgage Choice’s new remuneration model is expected to reduce its IFRS net profit after tax (NPAT) for the 2018 financial year (FY18) by approximately $30 million, which the CEO said was largely included in the 2018 result.

Ms Mitchell noted that the “one-off, non-cash adjustment” reflects the “higher level of franchisee share of future trail commissions”.

The CEO stated that the brokerage’s cash NPAT for FY18 is expected to fall between $23.1 million and $23.4 million and would drop to $16.5 million in FY19.


Following the news last month that the brand would be undertaking a review of its franchisee remuneration structure, with a view of implementing a “more competitive” model, Mortgage Choice has announced that it is introducing a new broker remuneration model that will provide its broker franchisees with higher remuneration and reduced income volatility.

Key features of the new model, which will be offered to all franchisees on an opt-in basis from August 2018, include: 

  • an increase in the average commission payout rate on residential lending from 65 per cent to 74 per cent; and
  • a “unique hybrid trail commission structure” which pays the best monthly outcome on either a flow or book basis.

In a statement, the ASX-listed brokerage said that the improved remuneration model aims to enable brokers to invest in their businesses as well as help Mortgage Choice to attract new, high-quality franchisees and loan writers to the network.

The new remuneration structure, which will be offered to all franchisees on an opt-in basis from August 2018, is designed to reduce income volatility and provide better protection for brokers in the event of a slowing market.

Ms Mitchell said that all of their broker franchisees are likely to opt in to the new model as they will be better off financially.

Speaking to The Adviser, the Mortgage Choice CEO also noted: “Our model before [was] too volatile for some of the franchisees to feel comfortable investing in their business.

“That’s why we came up with this idea of a hybrid-model, which allows smaller businesses who are growing and writing more and more volume to be able to earn more as they grow. But then some of our larger businesses wanted the stability of a larger book that probably has a higher run-off so that they understood exactly where the payments would be so that they were comfortable continuing to invest in their business.”

Ms Mitchell said that the new model would cater to the preferences of individual franchisees.

“Some franchisees wanted to be paid based on their book balances, and other franchisees wanted to be paid on their current business,” she continued.

“It takes a while to build up a big book, so younger franchisees didn’t like that idea. We calculate them both at the end of the month and whichever one is best for the franchisee, that’s the calculation they get.”

When asked what the changes would mean for the average broker operating under Mortgage Choice, Ms Mitchell said: “It means that they will be able to know that they won’t receive below a particular floor level.

“[If] they are writing more, they can receive extra payment because they’re having a particularly good six months for example - but they know that they will never receive below a particular floor level based on their book size.”

To partially offset the impact of a higher average payout rate to franchisees, Mortgage Choice has reportedly initiated a program to improve operating efficiencies across its business. It is changing the way it delivers some of its core support services to franchisees as it moves to a “more centralised, online and phone-based model”. 

It has commenced a program of implementing operational efficiencies across the business. This will result in an approximate 10 per cent reduction in its operating expense base. 

The brokerage CEO told The Adviser that the revised model was determined after an extensive consultation process with several industry stakeholders, including one third of its franchise network.

“We did a detailed review of the market, so we understood all the different kinds of models out there and what was going on, and we then went to our franchisees and got an idea of what the important things were that needed to me in the model,” she added.

“We put together some models, reviewed them with focus groups of franchisees and the board, and [received additional] feedback from the Franchise Advisory Council.

“We went all around the country and probably spoke to a third of our franchisees. We went back out again a few weeks ago with a final franchise model and said ‘tell us what you think’.

“We received some great constructive feedback that was absolutely taken into consideration to come up with the final model.”

Ms Mitchell also noted that feedback she has received from franchisees following the announcement has been largely positive.

“In general our feedback has been quite positive, and we’re really excited about that because we’ve had a great consultative process and I believe what we have delivered goes a long way to answering their questions,” Ms Mitchell concluded. 

[Related: Mortgage Choice introduces new broker remuneration model]

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