The mortgage broking industry has responded to Commonwealth Bank CEO Matt Comyn’s “anti-competitive” expression of support for a fees-for-service model.
The Finance Brokers Association of Australia (FBAA) and the Mortgage and Finance Association of Australia (MFAA) have criticised comments made by Commonwealth Bank CEO Matt Comyn in his appearance before the financial services royal commission.
Mr Comyn noted his support for a Netherlands-style fees-for-service model, whereby consumers are charged a fee for mortgage advice.
The CBA CEO also revealed that CBA had sought to introduce a “flat fee” commission-based model in January 2018, before choosing not to go ahead with the change in fear that the rest of the sector would not follow suit.
In response to Mr Comyn’s remarks, managing director of the FBAA Peter White said: “It was a great disappointment to see that CBA ha[s] a very loose grip on the realities of mortgage broking and the markets here and overseas. That said, it’s CBA so is expected.”
Mr White also pointed to FBAA research into the “consumer pays” model adopted in the Netherlands, stating that it has not delivered good consumer outcomes.
“The FBAA researched broker home loan commissions around the world late 2016 and in the Netherlands.
“Banks and brokers charge a fee to the borrower for a home loan and it is the same fee around 2,500 euros.
“It increased the cost to get a loan to the borrower as the borrower pays this fee, yet the banks pocketed the ‘distribution side cost’ now mitigated by ‘borrower pays’, with no reduction in interest rate — [resulting] in more profit to the banks.”
Also responding to Mr Comyn’s remarks, MFAA CEO Mike Felton said that CBA’s position was “not surprising”, but was “entirely self-serving” and was “designed to destroy competition and reduce the bank’s reliance on the broker channel”.
Commenting on CBA’s attempt to introduce a flat-fee remuneration model flat-fee model, Mr Felton said: “CBA’s model is anti-competitive and designed to drive consumers back into their branch network, which is the largest branch network of the major lenders.
“Mr Comyn’s solution for better customer outcomes is a new fee of several thousand dollars to be paid by consumers to CBA for the privilege of becoming a CBA customer.”
Mr Felton added: “Cutting what brokers earn by two-thirds would save CBA $197 million, which is good for CBA’s shareholders. However, it would destroy competition, leaving millions of customers without access to credit outside of major lenders.
“In addition, as has been highlighted by both the Productivity Commission and Treasury, consumers are simply not willing to pay significant upfront fees for access to a home loan.”
Further, the MFAA CEO claimed that a Netherlands-style consumer-pays model would only maximise bank profits and rejected an assertion by Mr Comyn that bank savings would be passed on to consumers.
“The proposal to adopt the Netherlands strategy is designed to maximise lender revenue. Under this model, broker customers pay the broker’s costs – instead of the bank – or branch customers pay a new fee that will substantially add to the bank’s revenue line and add thousands of dollars to the cost of getting a home loan from a lender directly,” Mr Felton said.
“This is a fantastic win-win for CBA but a massive lose-lose for consumers regardless of whether or not they use a mortgage broker. CBA either acquires a new customer with zero acquisition cost, or it receives a new fee and massively decreased competition, so it can return to the days of four lenders in Australia. It’s a great deal for the bank.
“Any suggestion that this profit will be passed back to customers in the form of lower interest rates is fanciful.”
Mr Felton also questioned a view put forward during the hearing, which suggested that brokers should earn the same as an in-house branch lender.
“Brokers are small business owners. They are not employees offering one product to customers. They pay rent, and staff, and electricity bills,” he said. They have to find every dollar they earn through servicing customers well and developing a strong reputation and referral network,” Mr Felton said.
“[According] to Deloitte Access Economics, brokers have an average of 13.8 years’ industry experience, which they draw on to offer a customer a wide choice of lenders and products that meet their needs and objectives. Will CBA commit to its branch staff having this level of expertise and choice for customers?
He continued: “The average broker earns $86,400 per year before tax. If you reduce those earnings by two-thirds, as CBA has evidently considered, and force consumers to pay for brokers’ services, the broker channel would be annihilated.
“Customers will be left with bank branches as their only option, the impact of which will be more acute in rural and regional Australia.”
The FBAA’s Peter White also highlighted the work of the Combined Industry Forum (CIF), noting that the group was formed to self-regulate off the back of findings from ASIC’s broker remuneration review and the Sedgewick Review.
MFAA CEO Mike Felton concurred, adding: “Frankly, we were surprised that it is being suggested that one of the major lenders should be tasked with reforming Australia’s home lending market, given the revelations of the past 12 months.”
Moreover, in his response to a question from Commissioner Kenneth Hayne regarding whether brokers deliver ongoing services to clients to justify the payment of trail commission, Mr Comyn claimed that such services were “limited”.
However, the FBAA rejected his ascertain, and added that trail commission is part of the upfront fee.
“[Even] though brokers need to do work looking after borrowers post-settlement as a part of the consideration of being paid a trail income, it is a part of the upfront fee,” Mr White said.
“[If you] dump trail you then must increase the upfront to at least around 1.15 per cent with no clawback. To date there is no better alternative than what is already in place (upfront and trail) as no structure shows you can mitigate a conflict of interest on any variation.”
Mr White added: “What do banks do to look after their home loan borrowers post settlement - send them emails and offers to take higher credit card limits and insurance products?”
[Related: Major bank CEO backs fees-for-service model]
Charbel Kadib is the news editor on The Adviser and Mortgage Business.
Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.
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