‘Tricky’ broker model ‘mostly works well’: Westpac CEO

“We [Westpac] recognise that brokers are an important part of competition in the market and creating the perception for customers that they can see the market more effectively,” the CEO said.

“Brokers provide price transparency, they provide a service in terms of convenience of going through paper processes and the like.

“In many cases, they [also] provide an ongoing relationship with the customer as circumstances change.”

However, Mr Hartzer said that the bank is “certainly in favour” of more transparency in the broking industry and noted that a shift toward a fees-for-service model in the broking industry would be “worth considering”.

“I’ve been on record saying that I certainly think it’s worth considering whether brokers should charge customers directly and explicitly,” Mr Hartzer continued.

However, the major bank CEO said that such a move would be “tricky”, noting that it would raise questions as to whether a broker is acting as an adviser.

“[There] has been some questions about what the broker obligation to the customer is, and [whether or not] there should be more obligations there. 

“We would say that it’s worth considering, but the [answer] is kind of in the name ‘broker’. They are essentially, on one level, a shopping service for the customer, helping them navigate as opposed to advising them explicitly about what they ought to do.”

He added: “We think it’s absolutely worth examining. We think at a minimum, more transparency is a good thing, but there are pros and cons to this; this is a tricky one.”

When asked by deputy chair of the committee and Labor MP Matthew Thistlethwaite whether a FOFA-style “best interest duty” could be extended to mortgage brokers, Mr Hartzer said that while it could be extended, the current broker model “mostly works well”. 

“I would say we have issues at the edge, which doesn’t mean we shouldn’t deal with them, but I wouldn’t say that the whole model has a problem,” Mr Hartzer said.

The Westpac CEO again stated that it would be “worth considering” such a move but warned that it may “dramatically” alter the broking model, which he said could have an adverse effect on customers.

“I would just highlight that if you did that, you would dramatically change the economics of the brokerage model, because the amount of compliance, training and cost impost that it would bring to many of those companies would be significant, and it may therefore change the competitive dynamics of the brokerage industry, which may not necessarily be to the benefit of customers,” the CEO said.

“That’s why I would say, certainly transparency is an important part; you could consider that, but I would think it through pretty carefully.”

Further, Mr Thistlethwaite alleged that the existing remuneration model could be incentivising brokers to write a higher portion of interest-only loans, which he claimed would prolong the term of a loan and the payment of trail commission.

However, Mr Hartzer said that there “could be a risk”, but he noted that there is no evidence to suggest that it was the case.

“Statistically, an [interest-only] loan amortises at the same rate as a [principal and interest] loan, which might sound counterintuitive, but it’s because [most] people who are taking out an interest-only loan are taking an offset account and they’re often affluent people or investors who have lumpy cash flows — so they’re putting the cash in an interest-only account and then paying it down overtime” Mr Hartzer said.

“The evidence doesn’t suggest that those loans amortise at a different rate.” 

[Related: Major bank responds to PC’s broker recommendations]