The CEO of a major brokerage is “disturbed” by the lack of “research” undertaken by the financial services royal commission and the Productivity Commission’s respective inquiries into the broking industry, urging them to “defer to ASIC” before announcing industry reform.
Speaking to The Adviser, Mortgage Choice CEO Susan Mitchell criticised the respective inquiries into the broking industry by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (RC) and the Productivity Commission’s (PC) report into competition in the Australian financial system.
Ms Mitchell noted a “disturbing trend” from the inquiries that she claimed have done “very little research” into the broking space.
The brokerage head urged the RC and the PC to defer to the Australian Securities and Investment Commission’s (ASIC) review into broker remuneration before making changes to the current structure.
“I think the most disturbing trend right now is the response from the royal commission and the Productivity Commission that have done very little research on the wider broking industry,” the CEO said.
“The reality is that ASIC spent a year going through all the data and speaking to all the different members of the industry.
“[ASIC has come up] with a very considered report that actually considers the structure of the broking industry in the wider financial services sector — that seems sensible to me.
“What I hope will happen is that both the Productivity Commission and the royal commission will recognise that ASIC has done some detailed analysis, while they have merely skimmed the surface and it’s important for them to defer to ASIC’s more detailed review.”
In a briefing to investors following Mortgage Choice’s announcement of a new franchisee remuneration model held on Thursday (12 July), Ms Mitchell noted that the brokerage would be “prepared to adapt to changes to remuneration” that could be proposed by the RC or the PC.
When asked what Mortgage Choice was doing to prepare for potential reform, Ms Mitchell told The Adviser: “We make sure we are up on what’s going on, we’ve educated our brokers as to what’s happening out there.”
Ms Mitchell added: “I think the most important thing is just to remain educated, keep up with what’s going on, talk to different people in the industry and understand which trends are getting more momentum and which ones are not.”
New remuneration model
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 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.
Ms Mitchell told The Adviser: “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,” the CEO 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.”
New model to cost Mortgage Choice $30 million
Ms Mitchell also told investors 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.
The CEO also said that the “one-off, non-cash adjustment” reflects the “higher level of franchisee share of future trail commissions”.
Ms Mitchell added 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.