The head of the major brokerage has disputed Commissioner Hayne’s suggestion that the Netherlands consumer-pays model did not result in “significant adverse consequences” to the market.
In his final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne reiterated his concerns from his interim report regarding broker remuneration arrangements that “might” be conflicted and warned that lenders that pay value-based commissions to brokers may be breaching their obligations under the National Consumer Credit Protection (NCCP) Act.
In the final, three-volume report, the commissioner therefore recommended that lenders be prohibited from paying trail commission to mortgage brokers in respect of new loans within about 12 or 18 months (which the government has already committed to), and within a further 12 to 18-month period, prohibited from paying any other commissions to mortgage brokers.
Commissioner Hayne’s thoughts on the Netherlands model
The head of the royal commission detailed “the Netherlands model”, as was raised as a suggested remuneration model for brokers by CBA CEO Matt Comyn during the royal commission hearings.
In 2008, the Netherlands’ Ministry of Finance started changing the payable upfront and commission amounts – reducing it to a 80:20 split, then to 70:30, and then to 50:50.
In 2011, the regulator announced its intention to completely ban commissions by the end of 2012, which came into effect at the beginning of 2013.
In his report, Commissioner Hayne wrote: “Changes of the kind that I have described above were introduced in the Netherlands in 2013.
“The mortgage broking industry continued without significant adverse consequences to its own operations, the market generally or individual participants. Mortgage brokers offered different remuneration arrangements including charging an hourly rate for advice and flat fees.”
He continued: “Furthermore, to ‘create a level playing field’ between direct and intermediated lending, lenders were required to identify their costs of providing advice and other services to borrowers who did not use a broker and expressly charge a fee to recover those costs from those borrowers.
“There is, therefore, readily available experience to be drawn on to move to a mortgage broking system where borrowers who choose to use a broker pay the broker a fee for the service.”
According to Commissioner Hayne, should the industry move to such a model, the result would be that “within a period of two to three years, brokers would no longer receive conflicted remuneration”.
He added: “No longer would the remuneration arrangements within the industry be such as can reasonably be expected to influence the choice of lender, the amount to be borrowed, or the terms on which the amount is borrowed.
“Changes of the kind I propose will give brokers the incentive to give borrowers value for money. In particular, the changes will induce brokers to search out the best deals available. To do that, they will have to look beyond the entities with which they may have become accustomed to dealing. And brokers will also have the incentive to offer, or continue to offer, services that borrowers cannot derive from the direct lending channel and for which borrowers are willing to pay.”
While Commissioner Hayne acknowledged that the proposed changes are “significant”, he added that they are “responsive to the current state of the residential mortgage market”.
Noting that the residential mortgage market is constantly changing, he said that it will likely be the case that the market will “change further as a result of what I have proposed” and that it was therefore “important that adjustments can be made as the market continues to evolve”.
Reduced lender competition
The recommendation to move to a consumer-pays model has been widely slammed by the industry, with associations, aggregators, brokerage heads and brokers all voicing their support of the broker channel in the past week, with both non-bank lenders and the major banks also noting that any changes to remuneration will require great care and consultation.
Further, given Commissioner Hayne’s recommendation to move to a Netherlands-style model, Loan Market Group's executive chairman, Sam White, has noted that a move to this structure would not only impact brokers, but could also affect the lending landscape too.
Mr White highlighted a 2017 study from business intelligence company Statista, titled Banking in the Netherlands, which showed that the total number of banks in the Netherlands decreased from 99 banks in 2007 (when the market still operated on an upfront and commission model) to just 44 banks in 2017 (nine years after fees-for-service were first introduced and five years after they were completely banned).
The report categorised the Dutch banking sector as “one of the most concentrated in Europe.”
While the Statista report does not specify the reasons for the decrease in the number of lenders, such as broker remuneration (and it should be noted that the global financial crisis occured over this period), Mr White believes " this set of data demonstrates a pronounced lack of competition in the Netherlands, significantly contracting the banking sector, with mortgage brokers no longer having the ability to introduce borrowers to numerous products offered by the smaller banks and lenders".
“This just further demonstrates the Netherlands model would be a terrible outcome for Aussies,” the Loan Market executive chairman said.
“This model has resulted in fewer lenders and fewer options for Dutch consumers. I fail to see how this is the best option for our marketplace. The model that has been held up as the roadmap for the Australian mortgage market has been proven, by this research, to result in less competition and the highest concentration of big banks in Europe,” he commented.
“This means customers have less choice, pay more fees and will get stuck in a home loan because the cost of changing will be too much as they’ll need to fork out each time they want something changed.
“The only guarantee that will result from the Dutch model is that customers will pay more and will be locked into their loans,” he added.
Mr White also noted that a Moody’s Investment Services report from last year found that one of the biggest Netherlands institutions, ABN Amro, had seen its net interest margins grow steadily since 2010, while Australia’s lenders have seen net interest margins decrease steadily since brokers were introduced into the sector in the mid-1990s (according to the Reserve Bank of Australia).
“It is very clear the real reason the big four banks in Australia are pushing for the Netherlands model. It will effectively kill off the competition coming from smaller lenders and banks and result in the banks having the lion’s share of the pie again,” Mr White said.
“This is definitely not the best outcome for customers by any stretch. Not only do customers in the Netherlands have less choice than before the upfront payment was introduced, but they are also paying fees. Fees that Australians don’t currently pay,” he said.
The head of the brokerage brand went on to say that he thought it was “astounding” that the Netherlands model had been recommended given that it would “[turn] the mortgage industry on its head and [result in] a financially detrimental solution for everyday Aussies who are looking for the best home loan solution”.
He concluded: “As in the Netherlands scenario, it feels very much like the banks are trying to reintroduce exit fees by stealth, making the idea of switching home loans deeply unpalatable to consumers.
“Some may suggest that the banks will reduce their fees accordingly, but what in the last 14 months of royal commission hearings would give anyone confidence that the banks do anything but look after their shareholders?” he said.
[Related: Open letter to CBA CEO Matt Comyn]