He who pays the piper calls the tune?
The gradual erosion of broker commissions has been a talking point for years, but 2008 could see talk become reality.
The profitability of mortgage lending has diminished dramatically over the last ten years – for all but the broker. With less fat on their margins, lenders are now more focused on economies and efficiencies of scale across their distribution channels while still trying to keep rates attractive to borrowers.
This content is available exclusively to
The Adviser premium members.
Aggregators have long suspected the major banks of scheming to cut commissions, with CBA generally regarded as the ringleader.
But whereas in the early days debate centred on whether commissions were too generous, it has now come down to whether they are sustainable. The question being asked is: can lenders still afford to pay the same rate of broker commissions while correspondingly delivering value to the borrower in today’s market?
Simply hacking down commissions would be suicide for any lender that’s serious about third-party distribution. Brokers now account for fifty percent of all new loans written and few would disagree this channel carries considerable weight.
Rather than a wholesale reduction of broker commissions what is more likely is a gradual restructuring of commission rates paid on particular products.
BankWest’s Rate Tracker loan could indeed be a sign of how future commissions may be structured. Aggressively aimed at undercutting the major banks, Rate Tracker claims to be a whopping 75 basis points cheaper than the average standard variable bank home loan rate.
But brokers wanting a slice of this product – which is obviously geared for retail distribution – will have to forego some up-front commission, although a more generous trail has been offered.
BankWest’s toe-dipping aside, it will be the big four banks that will be first to make any major move on broker commissions in Australia. Their focus remains on offering competitively priced products to the borrower while delivering maximum returns to shareholders.
For the major banks, profitability will play a key role in their future approach to broker commissions. Unpalatable though it may be for any head of third-party, having to cut broker commissions is looking increasingly likely in the current market.
At the end of the day, the real decider on whether commissions are cut across the board will be brokers’ reaction to any move by the banks. Will they continue to take the path of least resistance and sell bank products at a reduced commission, or will they vote with their feet?
Alex Whitlock
Publisher, Mortgage Business
