The CEO of a non-major bank has told the financial services royal commission that brokers provide “genuine competition” and that a fee-for-service model “doesn’t sound as attractive as the current structure”.
Nicholas Moore, the outgoing CEO of Macquarie Group (who will be replaced by Shemara Wikramanayake following his retirement next week), was called to answer questions relating to the nature of Macquarie’s business, an enforceable undertaking relating to the Macquarie Equities advice business, grandfathered commissions in advice and its relation to mortgage brokers and thoughts on broker remuneration.
Mr Moore reiterated that competition in the finance industry has helped drive down interest rates by 2.5 per cent and that this competition could not have occurred without the broker distribution channel, on whom Macquarie depends. Just 10 per cent of its total mortgage volume is originated through its branch network.
The commission asked Mr Moore: “What is the concern that Macquarie has about how changing commissions might affect the ability of mortgage brokers to provide that service to the non-major lenders?”
The CEO said that it was a “good question” and that it was “dealing a little bit about potential regulation we don’t know the shape of [yet]”.
He continued: “[O]ur general point is one of caution to say there can be unintended consequences of regulation. We are dependent upon this broker network for our business. And we think, having regard to history, that the broker network does provide genuine competition, and that genuine competition has reduced the cost for all mortgages.
“So our nervousness would be regulation could severely hamper that broker business, and so we’re providing a note of caution in terms of any thoughts about changing the regulatory structure that people think broadly about what the implications may be.”
Picking up its theme on the potential ramifications of changing broker remuneration, the commission asked the Macquarie CEO what his perspective was on the ability to pay broker commissions and the impact of fees for service.
Mr Hodge asked: “[W]hat do you think would be the consequence if Macquarie was prohibited from being able to pay mortgage brokers any commission or, in fact, make any payment to brokers — and the brokers were only able to obtain remuneration by charging a fee for service to the customer?”
The non-major bank CEO said that he “did not know” and that it would be “speculating”, but added: “[S]uperficially, it would not be... it doesn’t sound as attractive as the current structure. But, you know, I’m guessing here.”
Commissioner Kenneth Hayne then asked the CEO to elaborate on his response, asking: “Attractive to whom?”
Mr Moore responded: “I think the expression used is the stick of shock of actually seeing the upfront fee. One of the other issues discussed is whether the fee should be upfront or over the life. And our position is we would like it, coming back to the alignment point, to reflect the value being delivered which is over the life of the loan.
“So there is an issue, obviously, for — if you have an offer without a broking fee versus [one] with a broking fee — that makes a difference in the mind of the consumer. Economically, of course, the fee is being borne.” (Macquarie has already committed to changing its broker remuneration model from 1 December, following on from recommendations from the ASIC and Sedgwick reviews, which were backed by the Combined Industry Forum package of reforms.)
He elaborated: “That is, over time you would expect that whatever rate they’re offering, whatever any individual bank is offering, is going to be the same whichever channel it comes through. Do you agree with that?”
Mr Moore said that he believed that the proprietary channel would “have to meet the market”, adding that “the broker will be sourcing offers, and if banks aren’t meeting the market, they will not be receiving the business”.
“So it’s very simple; in our circumstance, we need to meet the market if we are to do the business.”
Mr Moore added that part of the broker’s role is “to be bringing to light the different offers, which change”.
He continued: “And it’s offers not just in terms of price but terms and conditions, as we know with long-term commitments are often even more important. And showing people the way through these situations. And it’s not just the upfront price but all the other circumstances around it — is an important function.”
Mr Moore concluded: “So, I see the broker providing a market role in terms of being able to provide the different offers to the client base.”