Emails between former CBA CEO Ian Narev and current CBA CEO Matt Comyn, released by the royal commission, have detailed the major bank’s abandoned changes to broker remuneration and its impacts on the channel.
Following on from the release of the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, many in the broking and lending sectors have voiced surprise, dismay and frustration at Commissioner Kenneth Hayne’s recommendation that the broking channel move away from a commission model to a fee payable by the borrower.
“How the fee is fixed is best left to the market to determine. It could be a fixed amount, a stepped fee, a value-based fee or some combination,” Commissioner Hayne wrote in his final report.
Such a model has been widely slammed by the industry, but some lenders – such as CBA – have previously (and repeatedly) backed such a model.
As outlined in the royal commission hearings last year – CBA CEO Matt Comyn revealed that while the major bank had sought to introduce a “flat fee” commission-based model in January 2018, it later abandoned these plans in fear that the rest of the sector would not follow suit.
“We come to a view that nobody will follow, we will suffer material degradation in volume [and] we will not improve customer outcomes,” Matt Comyn said during the hearings.
He further expressed his belief that a consumer-pays fee-for-service model, similar to that operating in the Netherlands, was “the most attractive model” but that CBA was unable to embrace it due to fears that “no one would follow in the absence of regulatory intervention”.
The proposed flat-fee model
Among the CBA exhibits submitted to (and published by) the royal commission are several email chains between the former CBA CEO Ian Narev and its former head of retail banking (current CBA CEO) Matt Comyn relating to how it would envisage a flat-fee being implemented.
As referenced during the first round of royal commission hearings, the emails show that, in March-April 2017, the then-head of retail, Mr Comyn, was intent on delinking the value of a loan from broker commissions and replacing it with a flat fee, conditional on “satisfactory customer outcomes”, as of 1 January 2018.
This would have improved the share of home loans written through the proprietary channel, he said.
Mr Comyn particularly noted in his 2017 email that broker commissions had risen 45 per cent since 2009 as a result of increased house prices. However, the decision to change broker remuneration from an upfront commission based on loan value to a flat fee was largely linked to the findings of the Sedgwick and ASIC reviews, which suggested that broker remuneration should not be directly tied to loan size.
Interestingly, the emails show that CBA “did a five-year longitudinal study for [ASIC] which showed that brokers’ incentives were demonstrably leading to poor customer outcomes”, which Mr Comyn suggested may have led ASIC to "rewrite" their report and findings on broker remuneration.
According to the exhibits, CBA’s former Home Buying strategy “focuse[d] on growing proprietary volumes and developing a complementary broker channel”.
“Part of our Home Buying strategy is to improve the share of home loans written through the proprietary channel, given its superior economics, accompanied by changes to our broker channel to ensure that it complements our strong proprietary offering,” the email reads.
“Creating a more complementary broker channel implies closer alignment with a smaller number of brokers. These are brokers who service customers that the proprietary channels are not well-placed to serve, including customers in regions without a strong proprietary presence, new-to-bank customers, and customer segments who currently have a strong preference for brokers.
“A broker remuneration model that better balances compensation across channels, in a manner that is consistent with better customer outcomes, and brings proprietary and broker channels to cost parity is an important enabler of this desired strategic outcome,” Mr Comyn wrote in his email.
Fee would have reduced broker revenue to $2,310
He later went on to outline that the proposed broker remuneration model would replace upfront and trailing commissions for all new loans linked to a single security and greater than $100,000 with payments of $500 p.a. paid monthly for up to six years conditional on satisfactory customer outcomes.
The fee would have also applied to all top-ups greater than $100,000, restarting the six-year payment period at the time of top-up funding and linking broker remuneration to “quality and customer outcomes, to be defined”.
Mr Comyn wrote: “Overall, we expect that broker behaviour will adapt to the new incentives under these arrangements to: consistently recommend the right product, loan value and structures based on customer needs, rather than maximising balance-linked commission payments for broker benefit; prioritise simple loans that require less effort to originate a higher number of loans; and focus on productivity, rather than pursuing complex or high-value loans (this may be tempered by the floor loan value for flat-fee payments).”
A “transition arrangement” for existing aligned brokers was also suggested to “retain existing, aligned brokers who deliver high-quality outcomes, as they adjust their businesses to align with the new model, and mitigate the risk to volume and market share if other lenders do not follow our lead to implement similar models,” he wrote.
The transition arrangements would have included grandfathering of trail, a discretionary $2,500 payment to eligible brokers for each new loan conditional on ongoing broker behaviour (and subject to clawback).
Moreover, Mr Comyn suggested that the proposed arrangement would have reduced the expected broker revenue on an average loan from $6,627 to $2,310 – which he said aligned with market guidance on the expected price of $2,500-$4,000 for complex financial advice following the Future of Financial Advice reforms.
“Removing upfront and trail commission will change the slope of a new broker’s remuneration curve over time – they will earn less as they build their portfolio, it will take longer to reach maturity, and remuneration will plateau at six years as the payments on their early loans expire,” he wrote.
“Early analysis suggests that brokers with smaller loan sizes, who are predominantly located in regional areas, will benefit, while brokers in metropolitan areas with large loan sizes will be worse off. These impacts are partially offset by grandfathering of existing trail commission.
“If the market moves to close to our position on the new broker remuneration model such that there is no loss of volume through our broker channel, we expect this change to deliver $197 million cumulative savings over five years on FY18 expected broker volume (assumes 35 per cent broker mix vs 46 per cent in FY16),” the email reads.
Changes would ‘set the Australian home loan market back 30 years’
Many in the industry have voiced their concerns regarding a radical change to broker remuneration, with associations, aggregators, brokerage heads, brokers, non-bank lenders and even MPs and some major banks voicing their support of the broker channel and broker remuneration structure in the past few weeks.
Finsure managing director John Kolenda has become the latest industry representative to share his belief that removing trail commissions would “set the Australian home loan market back 30 years and simply empower the major banks at the expense of consumers”.
Mr Kolenda told mainstream media earlier this week that he believed the royal commission evidence showed “a well-thought-out strategic attempt to eradicate brokers and strengthen retail branches”.
“Matt Comyn is proposing a broker should get $2,300 per loan, or approximately one-third of current commissions,” the Finsure head said.
“This would decimate the industry as this is revenue and doesn’t even include the costs of compliance, phone, office, car, internet and travel, etc.”
Echoing calls made by Mortgage Choice CEO Susan Mitchell regarding industry consultation on the changes, Mr Kolenda said the recommendation from Commissioner Hayne to drastically change its remuneration structure in favour of a fee-for-service model without having consulted the broking sector was “perplexing” given that brokers had revolutionised the home finance sector over the past three decades and noting that nearly 60 per cent of borrowers now went through the third-party channel.
“If Commissioner Hayne had bothered to ask, he would have heard that brokers have been pivotal in driving competition and transferring the power away from the major banks towards the smaller banks, regional banks and non-bank lenders, providing more options for consumers,” he said.
“But any drastic change to overall remuneration economics will put the market back 30 years and see consumers paying significantly more each month.”
Mr Kolenda added that Finsure was proud to be supporting an industry campaign with “the overarching objective of discouraging legislators from making changes to the regulatory framework that could harm the mortgage broking industry and negatively affect positive customer outcomes”.
“We are fully committed to protecting consumer outcomes, our brokers and the industry,” he said.