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Aggregator heads have slammed a column in The Australian Financial Review for suggesting that cutting out brokers would lead to cheaper mortgages, saying it misunderstands market dynamics.
Several leaders of aggregation groups have hit back at suggestions that banks could offer borrowers cheaper home loan rates if they circumnavigated the broker channel, putting forward evidence for why this would not reflect reality.
On Monday (19 May), the Financial Review’s Chanticleer column pitched the idea that major banks could potentially offer borrowers discounted interest rates on their home loans if they went direct.
In his column, author Anthony Macdonald said: “These banks typically pay brokers a 65 basis point upfront commission ($6500 on a $1 million loan) after a new loan settles, and trailing commissions worth another 15 basis points or so.
“If you just think about that upfront commission, what if banks could direct more business to their proprietary channels – to their branches, online, in-house brokers?
“They could use differential pricing – cheaper loans to customers that went direct to the bank.”
Some banks have already begun offering special rates to direct-only customers, with the Commonwealth Bank of Australia (CBA) having last year rolled out a new, Digi Home Loan offering for new-to-bank refinancers that was only available online and came with a cheaper rate than offered through either the broker channel or even through proprietary bank staff.
But, as was the case when CBA launched the new product, members of the broking community have once again hit back at the suggestion that banks should undercut the broker channel (the dominant channel for home loan borrowers in Australia), with several industry leaders saying that the economics doesn’t stack up.
Removing brokers ‘would just push acquisition costs back onto bank P&Ls’: David Hyman
David Hyman, the founder and CEO of Lendi Group, took to LinkedIn to voice his opinion, saying: “I’m sure bank investors like that idea. The thing is, Australia has already run that experiment – extensively – and consumers have voted with their feet in the opposite direction time and again.”
He said that some of the digital brands of the major bank’s, such as NAB’s Ubank and CBA’s Unloan, may “dangle headline rates 20–40 bps below their parent banks’ broker offerings” but suggested that these discounts come as these brands have “no branches and stripped-back feature sets”.
Hyman said that the commission paid to a broker does not “simply drop to the bottom line when a loan is written in-house”, outlining that branches are “a legacy fixed cost”, with banks needing to cover the cost of staff, rent, and fitouts and even “digital acquisition isn’t cheap”.
Reflecting on the digital proposition, he said: “Banks bidding for Google AdWords, Instagram eyeballs or prime-time TV slots pay up-front, well before a single loan settles.
“Internal costings disclosed to investors after recent proprietary-channel pilots show the marketing line item alone can swallow the putative commission ‘saving’.”
Hyman also said that banks would also need to wear a higher compliance cost without brokers, given that brokers have a legal duty to work in the best interests of their clients.
“That liability, and the file-keeping that goes with it, currently sits with the broker – not the bank,” he said, adding that brokers also help the bank source leads, triage customers, prepare applications, and support customers for the life of the loan.
“Banks pay nothing unless the deal settles; the channel scales up or down automatically… Trying to rebuild that network inside four balance-sheets would replicate cost – not remove it – and dismantle the legislated consumer-first duty that underpins public trust.
“Brokers are not why mortgages are expensive; they are the mechanism through which competition, when it exists, reaches the borrower. Banks have already proven that cheaper direct pricing does not tempt customers en masse.
“Slashing the broker channel would just push acquisition costs back onto bank P&Ls and erode consumer protection.”
Instead, he said that cheaper mortgages could be had by fixing the cost of funding. This could be done by either mandating superannuation funds to invest in high-quality, non-bank-originated residential mortgage-backed securities (RMBS) or creating a public RMBS program similar to Canada’s, he said.
“Super-charging non-bank funding while preserving broker distribution offers a playbook that is working in both the US and Canada,” Hyman said.
“Australia should steal shamelessly from it, instead of rerunning a go-direct experiment that history – and customers – have already rejected.”
‘Brokers helped shift the balance’: Sam White
The chairman of Loan Market Group, Sam White, and CEO of Loan Market, David McQueen, also published their thoughts on the Chanticleer article.
Executive chairman White said the idea of cutting out the broker channel for discounts was “a familiar, but very tired” and “completely misses the point”.
“People pushing this argument seem to be pining for the ‘good old days’, back when the only advice a borrower got came from someone sitting inside a bank branch, paid by the lender and legally bound to act in the bank’s best interest. That model failed customers. And it’s brokers who helped shift the balance,” White said.
“Let’s be clear, brokers have driven competition.
“We’ve opened up the market, brought in choice, and created better outcomes for everyday Australians. We stopped the ‘loyalty tax’ dead in its tracks. But articles like this want to drag us back to a time when customers had fewer options and ended up paying more. It’s getting really tiring.”
The Loan Market Group executive chairman also said that banks would still have to support in-house sales teams (which are increasingly being offered large remuneration packages and often more than brokers make independently) and that the real reason the broker channel may be less profitable than the digitally originated loans is not because brokers cost more, but because broker loans are repriced more frequently (thereby reducing the bank’s margins).
He said that brokers have “forced banks, and non-banks, to compete properly, on price and service”.
White said: “We negotiate sharper rates. We don’t push add-ons like credit cards. That lowers revenue for the bank but it’s the right thing for the customer. And that’s exactly why the channel works.
“Articles like this are a reminder that we can’t assume people get it. Every customer interaction is a chance to prove what this channel is about. This whole industry has grown almost entirely through word of mouth. And now 3 in every 4 Australians getting a new mortgage choose to use a broker. That says everything.
“So we’ll keep doing the work. We’ll keep earning trust. And we’ll keep making sure every Aussie gets a fair go no matter which lender they end up with.”
‘What banks really want is to claw back ownership of the customer’: David McQueen
The CEO of major brokerage Loan Market, McQueen, also took to LinkedIn to outline his thoughts, saying: “What banks really want is to claw back ownership of the customer…
“Let’s be real, the cost of distribution isn’t what will hurt borrowers most. A lack of competition will.
“And brokers are the ones keeping that competition alive.
“We should remember that brokers are the reason mortgage competition still exists. Undermining that comes at a cost.”
What do you think would happen to the price of mortgages if banks were to cut out the broker channel? Let us know in the comments below!
[Related: Broking industry frustrated but unrattled by CBA move]
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