The aggregation business is undergoing momentous change. Groups are consolidating and, in recent times, lenders are increasingly buying stakes in the top performers. In this special report, The Adviser looks at how this will play out – both positively and negatively – for the brokers they represent
With the rise of the third-party channel came the rise of the aggregator, and the latter has now had the best part of 25 years to leave its footprint on the mortgage broking industry.
Initially a conduit to the banks, aggregators have managed to successfully expand their roles to offer brokers a palette of services from technology, compliance, commissions, lead generation and more.
As with any maturing market comes the consolidation. Arguably the biggest thing to happen to the aggregators in recent times – that has gone largely unnoticed by the industry as a whole – has been financial institutions (primarily the lenders) surreptitiously buying stakes in the groups themselves.
The big news in May was Mark Bouris’ Yellow Brick Road’s acquisition of Vow Financial, one of the last of the larger aggregators who remained mostly independent.
NAB’s 2012 purchase of PLAN, Choice and FAST has been given plenty of press; while CBA upped its stake in Aussie from 33 per cent to 80 per cent in May last year (a deal said to have pocketed owner John Symond a cool $185 million in CBA shares).
Yet, arguably the biggest – and quietest – mover in terms of lenders purchasing a stake in aggregator groups would have to be Macquarie Bank.
Late last year it acquired 25 per cent of Connective, Australia’s second largest aggregator group, while it’s reported to have a minority shareholding in the biggest, AFG, as well as an undisclosed stake in Vow.
This is on top of the 10.5 per cent share it has in Yellow Brick Road, 17.5 per cent stake in Bluestone and 19.8 per cent stake in Homeloans Ltd.
Coincidentally, a report in June by JP Morgan found Macquarie’s mortgage book was expected to double to $30 billion by 2016. So if it’s not evident already, it’s clear Macquarie has its eye on a big stake of the residential home loan market.
Chief executive officer for the FBAA Peter White believes the reason banks often buy smallish stakes in aggregators is primarily two reasons: it’s mitigating risk and “they like to share the love around”.
Mr White adds: “I’d say a lot of these banks buy 20 per cent of these aggregators because it gives them a stake in the ground, it gives them a seat at the board, and that gives you a big say in what happens.
“A player like Macquarie, they just don’t get involved and expect nothing in return. What’s their thinking over the next five years? Where is this taking them? What else are they going to bring to the market that will be innovative? And that’s why they want access to the distribution. You just don’t know what their other drivers are,” Mr White argues.
So what does all this mean for brokers? Are we seeing a transitioning of the industry into four or five mega players owned by (largely) benign majors? And what does it all mean for brokers? Or even smaller lenders left without a stake in an aggregator business?
A hidden agenda
According to the MFAA, there are about 50 aggregator groups servicing brokers nationally. And if The Adviser’s annual Switching Aggregators survey is to be given any merit then it’s safe to assume some 98 per cent of brokers are signed up to at least one of the 50.
Mr White agrees there’s been a lot of subterfuge of late regarding lenders buying into aggregator groups and says brokers would probably be surprised to know their aggregator perhaps wasn’t as ‘independent’ as they’d been led to believe.
“I think if brokers better understood who owned their aggregators there’d be far more negativity around this issue,” says Mr White. “At the end of the day, brokers work their butts off and where does all the profit go in the backend with the aggregator? Basically back to the bank’s pocket.
“That said, the banks support of these aggregators hasn’t been such a bad thing,” Mr White stresses. “It’s given them a lot of strength, but it does create the impression the aggregators are having their strings pulled by someone.”
Ultimately, the unseemly issue of conflict of interest arises.
If a broker doesn’t have to reveal to a customer who their aggregator is, why should a broker have to reveal who owns the aggregator?
“It’s a murky area,” agrees Mr White. “Is it a conflict of interest if a broker offers a loan from a bank that owns the aggregator? Probably. But if you say that then what do you do with Aussie? Aussie’s basically owned by the Commonwealth Bank and so every time an Aussie broker writes a CBA loan is that a conflict of interest? I don’t know.”
However, Mortgage Choice’s CEO, Michael Russell, disagrees there’s any ethical issues with banks owning aggregators. “Brokers are staunchly independent, brokers will always put the customers’ best interests first,” he says.
“Where the waters can get muddied is when lenders continue to pay varying upfront trail and trail commissions, and the only potential conflict is where the aggregation lenders all pay different levels of commission and they’re passed through to the broker.”
An ulterior motive
So what are the prime drivers behind lenders buying into aggregators? For starters, they can’t actively promote their products and, in reality, the profits aren’t going to make huge uplifts to their balance sheets, save for signing the customer to the actual loan in the first place.
Mr White says the reasons are twofold: good aggregators are typically commercially sound businesses and “that means the business is viable and I am going to get a return on my money”.
The other reason is all the more subtle. Yes, banks want to flog more product – and part-owning the aggregator gives you an excellent platform to do so – but they want to do it in a discrete, less ‘shouty’ way.
“This isn’t an exercise in shoving it down your throat,” Mr White says. “It’s all the more subtle than that.
“The reason banks buy into aggregators is as much about marketing as it is about directly or indirectly moving more stock. From a visual point of view or a branding point of view, if they (the aggregators) hold a PD day, a business function, an annual conference or anything they do, the lender wants their name and their logo right alongside it.
“It’s basically a numbers game, but at the end of the day, if your product is no good, nobody’s going to sell it anyway,” he says.
Meanwhile, for Mr Russell it’s all about banks having a greater reach down the food chain. “The return on equity on a mortgage product is again at pre-GFC levels and the banks again want to write more mortgages and that’s a great thing for the industry,” he argues.
“The pendulum has swung back and a lot of lenders now have an appetite to take a position in a distribution business. Aggregation’s a scale play; you need volume because the aggregation margins have eroded over the past five or six years. It’s a scale game now.”
Good news for brokers
Love or loathe the idea of lenders buying into aggregators, it’s undoubtedly a ringing endorsement by banks of the third-party channel.
And as bank-owned aggregators increasingly chase size and scale, that will invariably translate to better deals and inducements as they try and cajole brokers away from their incumbents.
Vow Financial’s CEO, Tim Brown, agrees. He says what we’re seeing in the aggregation market – lender involvement and consolidation – happens in any maturing industry. Margins are reducing so scale becomes more important, Mr Brown says. The upside to that is brokers will get to access more products at a better price.
However, to get the sort of scale they’re after, aggregators will have to fight harder to retain existing brokers while stealing others away from competitors.
“I believe it’s getting more aggressive than ever,” Mr Brown says of the competition to recruit brokers. “And it’s getting harder for aggregators to differentiate themselves when many groups have similar offerings.
“It’s forcing consolidation as margins reduce and scale becomes more important. But I think brokers will be the benefactors of this, from pricing wars and increased competition.”
Having said that, Mr Brown acknowledges switching aggregators can be a painful process for brokers and aggregators alike and, increasingly, “aggregators are realising it’s easier to keep existing brokers happy than look for new ones”. This, he says, will mean “improvements to systems, compliance, training, and development days, which in turn will improve a broker’s profitability”.
Rise of the mega-aggregator
So, with an industry that’s maturing and consolidating, businesses chasing scale and a growing acceptance of lender-owned aggregators, is it only a matter of time before the industry is swallowed up by a few major players?
The FBAA’s Mr White can see it happening. “In part, that’s right,” he says.
“There’s every chance we’ll end up with only half a dozen. But I’m hoping the little guys will also consolidate into strong independents.
“There’s room for half a dozen small to medium independents to ‘keep the buggers honest’ so to speak.
“There are some good independents out there and it would be very disappointing to see them disappear. But I do think the very small guys will have to amalgamate to stay independent and take on the bank-owned groups.
“Do we want the industry controlled by the banks? Personally, I don’t and that’s why the independent aggregators are going to be so important,” he says.
However, Connective director Mark Haron dismisses talk of the industry being reduced to just a few players. “I don’t think the industry is presently in danger of being too consolidated and being too concentrated,” he says. “Particularly in the aggregation space, there is a broad range of aggregators and I think aggregation is as competitive as it’s ever been.”
Ballast chief executive Frank Paratore agrees a consolidating market comes with more efficiencies and better service, but warns the industry should be careful what it wishes for.
“What the broker market needs is more competition in the marketplace, not less,” Mr Paratore says.
The MFAA’s chief executive, Phil Naylor, recently weighed into the debate about lender-owned aggregators pushing their products on brokers, when he said he’d seen “no evidence bank-owned aggregators are favouring the bank that owns them. If they did they would be destroying their credibility as a provider on a range of lenders”.
Nor did Mr Naylor believe banks owning aggregators would mean more disclosure obligations on lenders and brokers.
“I don’t see anything on the horizon that is in the regulator’s mind that would indicate further disclosure,” Mr Naylor said. “I’m not sure what disclosure could be given because brokers pretty well have to disclose their commissions, their lenders and a whole lot of things.”
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