One would think that with more than half of mortgages being written by brokers, the dominance of the big four would be disrupted. But this is not the case.
It’s been a while since I read through ASIC’s 243-page remuneration review. The hefty document was published in March last year and kept us reporters well fed over much of 2017.
Looking over the report again, it seems that ASIC’s remarks about competition pose problems, or at least could be misconstrued; the regulator says that brokers are good for competition, but also highlights that most brokers send the bulk of their deals to a major bank.
According to ASIC, brokers drive competition in two ways. Firstly, they force lenders to compete harder for their business, driving prices down. Secondly, ASIC notes that brokers play a valuable role in providing a distribution channel for small lenders that do not have their own branch network.
But just how successful has the third-party channel been in giving more business to the smaller players?
ASIC found that the most commonly recommended lender for 12 out of 14 aggregators was a major bank. Major banks also accounted for most aggregators’ second to fifth most recommended lenders.
It’s worth noting that ASIC counted the subdivisions of banks and white label loans as separate lenders, even though mortgages may have been funded by the same major bank.
“Broker businesses on average sent almost 40 per cent of loans to their most commonly recommended lender,” the report said.
“The second and third lenders received 21 per cent and 13 per cent, respectively. Overall, 80 per cent of loans (by value) were distributed across four lenders.”
These figures are calculated at the broker business level; the concentration at an individual broker level may be higher.
“This indicates that, while an aggregator may have a large panel of lenders, brokers are more likely to send loans to a small number of lenders.”
ASIC also observed that “broker businesses’ most commonly recommended lenders tended to be the major banks”.
“The most commonly recommended lender for 74 per cent of broker businesses was a major bank,” the report found.
“Major banks also accounted for 61 per cent of broker businesses’ second most and 54 per cent of their third most recommended lenders. White label loans were most commonly recommended by some broker businesses.”
Which begs the question: why are brokers sending so many loans to the major banks?
One simple answer could be inertia — brokers are used to working with a particular lender, and they know that they can get a deal approved with that bank. But is this really in the best interests of their client? This is worth considering.
Another reason could be that the major banks simply have better third-party infrastructure and systems to support the broker channel. Their products and features may be superior to the alternative lenders.
But there are signs that the dominance of the big four is being shaken somewhat.
AFG’s latest Competition Index figures for the final quarter of 2017 shows that the market share of the majors fell to a post-GFC low of 62.6 per cent.
The non-majors appear to be making a comeback and the non-banks are also seeing an increase in broker flows.
According to the Australian Bureau of Statistics, the number of owner-occupied dwellings financed by non-banks rose by 1.3 per cent in November 2017, following a 3.6 per cent rise in October.
In fact, on a seasonally adjusted basis, the non-banks consistently grew their share throughout 2017.