It’s currently inconceivable that a fee-for-service model could be implemented in an “equitable” way across the mortgage industry, an executive has said.
Speaking to The Adviser, Darren Cantor, managing director at Mortgage Advice Bureau (Australia), said he cannot imagine how a fee-for-service model – which would require the borrower to pay a mortgage arrangement fee to brokers and lenders – could be implemented in an “equitable” way across the mortgage industry.
This model was proposed by Commissioner Kenneth Hayne as an alternative to lender-paid upfront and trail commissions, which has been intensely scrutinised for being “conflicted”. The idea, which was presented in the final royal commission report, sparked fears over the longevity of the mortgage broking industry and the impact on consumers should such a drastic change be legislated.
Arguments included that consumers might not be able to afford the fees attached to mortgage advice, resulting in the reduced ability to access the right loan products (including products from the smaller lenders), and those who are able to afford the fees could be “forced to absorb significant costs that the banking sector [was] previously responsible for”.
The Mortgage Advice Bureau managing director said the indication from the final royal commission report is that Commissioner Hayne would like to see consistency in the mortgage arrangement fees that are charged across the industry.
However, big banks with sizeable branch networks have the advantage of scale and will be able to push fees down to the point they “undercut the broker market”, according to Mr Cantor.
He additionally said that he cannot see how smaller banks and non-bank lenders that do not have a big shopfront presence and are reliant on brokers would be able to charge similar fees to bigger banks or even have sufficient access to customers who could simply walk into their local bank branch when seeking a mortgage.
“How on earth are they going to be able to distribute their products and also charge a fee that is the same price as the big banks?” Mr Cantor said.
“We already know the big banks get funding advantages because of their scale and deposit books. They will get a speed advantage.
“It’s playing into the hands of the big banks. It doesn’t make sense.”
The managing director acknowledged that smaller banks and non-bank lenders could target customers online, but they would be competing with the “significant marketing budgets” of the major banks who could increase their spend on search engine optimisation or other digital marketing strategies.
The Productivity Commission noted in its final report about competition in the Australian financial system that there are a “blizzard of barely differentiated products” out there for customers to choose from – nearly 4,000 different residential property loans and over 250 credit cards. Oftentimes, according to the report, households choose not to refinance due to the overwhelming amount of options to sift through even if it means they could save up to $1,000 a year on their home loan.
“Who’s the victim in this? It’s the consumers because they’re not getting the choice they deserve,” Mr Cantor said.
“I think it’s fair to say that the everyday mum and dad customer wouldn’t be aware of more than half of the lenders that are out there in the market, let alone all the products [on offer].”
UK shows no trail can lead to more churn
Further, if Commissioner Hayne’s recommendation to abolish lender-paid commissions is implemented, it could inadvertently lead to greater churn, if the UK market is anything to go by, according to the Mortgage Advice Bureau managing director.
“What happened in the UK with brokers is they basically put customers in [two-year] fixed rates, and once the fixed rate rolled off, they refinanced with another lender in order to gain another [upfront commission].
“The broker’s psyche in the UK was that if I put [the customer] in a five-year fixed rate loan, I can’t do anything with that customer for five years, but if I put them in a two-year [fixed rate loan], I have a chance of refinancing their loan in two years’ time.
“The customer may have been better served in a five-year fixed rate loan or better served to not have a fixed rate loan at all. That is a potential unintended consequence of the removal of trail.”
For Mr Cantor, the final recommendation to ban trailing commission was foreseeable, given the tone of the royal commission’s interim report.
However, he acknowledged that it remains unclear as to whether the government will take on board Commissioner Hayne’s recommendation to eliminate commission-based broker remuneration.
Mr Cantor noted that in some international jurisdictions, brokers have been operating with little or no trail for years.
In the UK, trail commissions are not paid at all, while in Canada and New Zealand, they’re only paid by some lenders. In the Netherlands, the industry operates on a fee-for-service model, where brokers and lenders both charge customers a mortgage arrangement fee.
From a UK perspective, where Mortgage Advice Bureau was founded, Mr Cantor said the abolition of trail forced brokers to ramp up productivity. As a result, UK brokers have become a lot better at cross-selling products, such as insurance.
Given how “underinsured” Australia, the managing director believes there could be an opportunity for mortgage brokers to play a more active role in the insurance market.
However, he admits that it’s going to be no easy feat for Australians brokers to offset the loss of income brought on by the banning of trail.
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