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Back to the beginning: Part 2

25 minute read

Easy money, high commission rates, an explosion of lenders to choose from, market opportunities around every corner, little restrictive regulation, technology efficiencies and innovations…it sounds too good to be true. Yet for the early 2000s, this typified the broking industry, until a crisis so big it took on its own three letter acronym hit hard. In an instant, the industry looked like it was on the verge of fighting for its very survival. This was the decade of lofty highs and frightening lows for the third-party channel…

If the 90s was the birth of the mortgage broking and non-bank lending industries, then the noughties (the decade from 2000 to 2009) was undeniably the  decade of the aggregator, as opportunities increased and technologies evolved to provide business support to the booming broking sector.

“Aggregators really sharpened their propositions from around 2000 to the GFC,” recalls Michael Russell, the former CEO of both Choice and Mortgage Choice.

And why wouldn’t they? Established players like Choice, AFG and Mortgage Choice (and PLAN from 1999) found themselves with an ever-increasing number of competitors, all of whom were looking for ways to better connect with brokers, particularly through their technology offerings.

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During this period, National Mortgage Brokers (nMB), eChoice, FAST, Connective, Southern Cross and other smaller players were all established. Meanwhile brokerage Astute moved into the aggregation space, Aussie transitioned from a non-bank lender to a brokerage and retail aggregator, and the Ray White real estate network rebranded its financial services division to Loan Market, creating a distinctly separate entity.

The establishment and refinement of aggregation and broker support services coincided with the explosion in the number of mortgage lenders, which reached its lofty peak in the early to mid-2000s.

Indeed, ratings agency Standard & Poor’s notes that bank share of the Australian mortgage market fell to 77 per cent in 2002 (however by 2015 – aided in no small part by the GFC – this had soared back up to 94 per cent).

“Before the global economic slowdown, non-bank lenders accounted for a significant proportion of new advances, up from a negligible amount a decade earlier. The non-bank sector, mainly comprising prime lenders, began to include specialist non-conforming, sub-prime and high LTV ratio lenders in the 2000s,” the agency says in its 2015 report An Overview of Australia’s Housing Market and Residential Mortgage Backed Securities.

All of this growth in consumer choice and broker support enabled the third-party channel to flourish and continue its meteoric rise… Welcome to the second instalment in The Adviser’s three-part series looking at the evolution of broking as an industry.

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A WORD OF THANKS

a feature like this doesn’t happen by accident. In fact, The Adviser has spent several months researching, interviewing and compiling the list of key events, people and companies that have made the broking industry what it is today.

Of course the industry is not shaped by just a handful of individuals – every single participant within the industry has, does and will continue to shape it as it evolves to meet changing consumer needs. We spoke with just a small number of people from across the country and the broking spectrum for this feature – sadly it is just not possible to speak with everyone.

A huge thanks goes out to all of those individuals and organisations The Adviser spoke with to put this feature together. We would also like to pay homage to those who have retired from the industry and pay our respects to those veterans no longer with us. And to those who we did not speak with as part of this feature but feel you have something to say, please get in touch!

SHOW ME THE MONEY

There is an old saying that what goes up must come down, and so it was in the 2000s for broker commissions.

While commissions increased upwards in the early to mid-2000s on the back of intense competition among an ever-increasing pool of lenders, the GFC came as a sharp slap in the face, with commissions slashed by as much as a third, seemingly overnight.

“They were quite savage and whilst they did impact on head group earnings significantly, the real pain was felt by individual brokers and broking businesses,” says Michael Russell.

“Their earnings were cut by up to 30 per cent without warning.”

John Flavell, CEO of Mortgage Choice, adds: “While some lenders will tweak their commission payments from time to time, the vast majority still pay brokers the reduced commission.”

But as others point out, while the actual percentage rates for commission have generally remained below their pre-GFC peaks, the rapid rise in house prices since that time have more than offset the loss of earnings in most parts of Australia.

PROFILES: INDUSTRY INTEL

Prominent members of the Australian mortgage market share their thoughts on the third-party channel…

Known nowadays as the head of financial services business Yellow Brick Road, Matt Lawler’s biggest impact on the industry arguably comes from his time at NAB, where he oversaw the acquisition of the Challenger businesses, including PLAN, FAST and Choice.

Mr Lawler believes vertical integration has actually helped increase mutual understanding between brokers and lenders.

“I think vertical integration can work as long as the broker is supported to provide advice to their customers that is of the highest standard and not conflicted by the ultimate owner,” Mr Lawler explains.

“The industry has got to be really clear that it acts for the client, and very careful that it doesn’t do what financial planning did, which was that it allowed too many schemes or conflicted remuneration structures to infiltrate, which then undermines the trust of the consumer.”

Matt Lawler, chief executive, Yellow Brick Road

Another key figure in banking at the time was Kathy Cummings.

“CBA was and still is fiercely protective of its proprietary distribution channels and I fought some fierce battles in establishing a broker business,” she recalls. “It was simply a matter of bringing back the feedback from brokers, opening their eyes as to what was actually happening in the mortgage market.”

Ms Cummings says that a uniform loan application form will never happen, because of different criteria and requirements of each lender.

“I remember right back, maybe 1999-00, when Mortgage Choice called a meeting of the lenders to try and get everyone to agree to one application form. The industry has come a long way from that point, because you can just imagine 30 lenders sitting in a room and everybody’s got their own systems and processes, no one wanted to agree on how to do this,” she says.

Kathy Cummings, former head of third-party and mobile banking, CBA

2000: KEY EVENTS

CBA becomes the last of the major banks to enter the broking channel following its acquisition of Colonial. Initially all thirdparty loans go through the Colonial brand, but within a short period of time, CBA moves to offer its own branded loans to brokers.

Finance and Systems Technology (FAST) is established as an aggregator.

eChoice becomes a brokerage company.

Australian Mortgage Brokers (AMB) is founded.

Specialist lender Bluestone Mortgages begins operating, initially as a mortgage origination and securitisation platform. The group subsequently expands into New Zealand and Europe in 2003 and 2009 respectively.

Mortgage Choice writes its 50,000th loan

2001: Bank recognition of the channel

It wasn't exactly a smooth start for the broking channel, with relations decidedly frosty between brokers and some of the banks. Many older members of the industry will recall full-page newspaper ads from both sides deploring the operations of the other.

But the early 2000s marked a rapid thawing in relations, and banks began a significant investment in engaging with the broker channel and establishing a new business model alongside their existing offerings.

One of the clearest examples of this marked turnaround is CBA. The last of the majors to enter the channel in the early 2000s, just a few years later in 2008, the bank showed its confidence in the sector by stumping up $71 million to buy one-third of Aussie.

“It was a milestone event when CBA made the decision to replace Colonial with the CBA brand – that was a really significant event,” says Michael Russell.

“What was an absolute staunch competitor ends up buying the business: looking at the business and saying ‘They are too good and too strong to ignore, we need to ultimately invest in them’. You couldn’t get higher flattery than that,” adds Aussie’s CEO James Symond.

Macquarie Bank was an early investor with its 2001 purchase of a stake in AFG, while NAB became a major owner of brokerage assets following the 2009 acquisition of the Challenger businesses, including FAST, PLAN and Choice.

What is interesting is the divergent strategies of Australia’s major banks. While NAB and CBA have shown aggressive interest in owning parts of the domestic broking and aggregation channel, Westpac has focused its efforts on a number of high-profile acquisitions in the banking space, swallowing up the likes of Bank SA and Bank of Melbourne, culminating with the massive $18.6 billion takeover of the St George Group in 2008.

ANZ however, despite being the first of the major banks to engage with brokers, has remained a standalone lender.

2001: KEY EVENTS

National Mortgage Brokers (known as nMB) begins trading, initially as a retail broking business to service clients.

Macquarie Bank spends an undisclosed sum on acquiring a 10 per cent stake in AFG.

Homeloans Limited is listed on the ASX, demonstrating further recognition of the nonbank channel.

Also in this year, non-bank lender Mortgage Ezy, specialist lender Pepper and short-term lender Quantum Credit are all established, as the number of alternative lenders continues to boom.

2002: Convergence in action

Convergence  a hot topic at present, particularly since the July 2015 announcement that accounting body CPA Australia applied for an Australian Credit Licence, opening the door for its members to offer mortgage broking services. However convergence is nothing new for the industry. Just look back to the late 1990s and particularly the 2000s at the real estate push into broking as one such example.

The LJ Hooker network began a very modest entrance into broking as early as the 1980s, yet it was the group’s 1989 acquisition by Suncorp Bank that led a sustained push by major real estate networks into the mortgage market – a push which would ultimately lead to the establishment of recognisable players including Loan Market, LJ Hooker Home Loans and Oxygen.

“The main reasons at the time were really due to consume demand. Everyone was looking for different options; the broker market was starting to emerge…and we just felt that was the right time to launch and complement the real estate offering,” says Jeff Chapman, LJ Hooker Home Loans’ national product and marketing manager.

Suncorp’s move into the space spurred other networks to expand their own service offerings.

“We started a mortgage broking business, kicking off in Queensland, and we started the business purely as a defensive play against this transaction,” says Loan Market chairman Sam White.

But both Mr Chapman and Mr White are quick to point out that their respective businesses now operate as standalone entities.

“It’s not as simple as real estate getting into home loans: our home loans business is a completely separate business to real estate,” Mr Chapman says.

2002: KEY EVENTS

In September, Aussie repositions itself as a mortgage broker, off ering mobile broking services.

In the same year, “Aussie John” Symond is awarded the prestigious Member of the Order of Australia Award for his role as a consumer champion in the mortgage market.

In December, Oxygen Home Loans (formerly McGrath Home Loans) is launched by the McGrath real estate network.

Aggregator Southern Cross Broker Network (SCBN) is founded.

FROM HAND TOOLS TO AUTOMATION

The 2000s saw a dramatic shift in the tools available to brokers, largely because of the emergence of three key factors at the same time: the rise of the internet; the increasing prevalence of aggregators and their quest to provide broker support; and the major banks entering the broker market, aided by their large budgets and technology capabilities.

Fax machines were gradually replaced by online lodgements, CRMs and collation tools allowed for improved archiving of client information and mobile phones allowed on-the-go communication.

“We had a wonderful simulator that was working on an Excel spreadsheet, and it was quite something at the time, where a broker could put in all the details of the customer’s requirements and we could work out which would be the best bank for them: wow!” says Steve Sampson of his time at Choice.

Some of the early digital tools, however, left a lot to be desired.

“When banks first started talking about electronic lodgement, they all wanted the broker to lodge directly to their platform, and some of them were pretty shabby and it didn’t save anybody a lot of time,” says AFG’s executive director, Kevin Matthews.

“The reason for this is that early on, many of the banks had to re-key into their systems as the broker-supplied information didn’t auto populate. A joint initiative between AFG, Aussie and Mortgage Choice called Trident went a long way to resolving this issue, saving time and reducing errors.”

Technology, however, benefited not just brokers but also their customers. “Come the turn of the millennium, the tide turned - the internet and the dot com boom meant there was a lot more information available on loan products, so consumers really were more informed and had the capability to make better decisions,” says consumer finance advocate, Lisa Montgomery.

That in turn flipped the traditional mortgage space on its head, with the dictated now becoming the dictators in terms of product features and costs.

“Consumers weren’t just walking through the door cap in hand for a loan. They were coming in and saying ‘I want this rate, I want these features, I want these benefits and this is what I want my loan product to do for me’.”

2003: Aggregators get connective

Aggregation businesses arose as savvy individuals operating within the broad mortgage market recognised the need for brokers on the ground to access business support and for a prominent intermediary to act on behalf of brokers when dealing with lenders.

AFG is widely recognised as the first, but the 2000s saw a huge rise in aggregator services being established to support the rapidly growing third-party sector. The biggest to arise from this period was Connective, which was formed in 2003 by brothers Glenn and Murray Lees – themselves experienced mortgage brokers.

“Aggregation has allowed the mortgage broking industry to get more organised,” says Yellow Brick Road’s CEO, Matt Lawler.

“Aggregators play a really important role in organising groups of brokers and making sure they uphold professional standards. But they also create efficiencies in the industry as well: efficiencies around communication and education, efficiencies around systems and processes, commission payments and so forth.”

There were some initial challenges for brokers though, as many skilled brokers left their posts to work on the launch of aggregator groups.

“I remember the Olympics was a really key turning point for us. We had an employeeonly structure leading up to the Olympic Games, and that was September 2000, and then after the Games we lost a fair few people very quickly to aggregation groups,” says Loan Market’s Sam White.

2003: KEY EVENTS

Connective is launched by Glenn and Murray Lees, who between them brought a wealth of knowledge in broking, finance, technology and commercial law.

The Ray White group rebrands its financial services business to Loan Market.

Mortgage manager Australian First Mortgage is established.

Wholesale mortgage funder Mortgage Asset Services (MAS) is founded by mortgage and banking veterans Troy Phillips and Brett Hartley.

Astute moves into aggregation.

Comparison rates become a mandatory disclosure to consumers from July. The comparison rate was introduced with the aim of helping consumers identify the best overall rate, combining interest rate plus associated fees.

PROFILE: KEEPING IT IN THE FAMILY

Like many in the industry, Loan Market chairman Sam White knows there are distinct benefits as well as challenges to being part of a family business.

The real estate and broking industries are somewhat unique in Australia because of their sizeable emphasis on family.

Loan Market, Aussie, Mortgage Choice, Connective, Ray White, Raine & Horne and others all grew from family start-ups.

“When I was in school, everyone assumed I would work in the family business, but I always said I wasn’t going to,” Mr White recalls.

Mr White began part-time work with Ray White while studying for a law degree. Eventually, when rival LJ Hooker was acquired by Suncorp, the Ray White business saw an opportunity to spread its own wings into broking.

“That was a big change for us and so I became a mortgage broker in Queensland. I think I was the second one that came on and then I moved to Sydney.”

Since that time, Loan Market has grown to become a major player in the mortgage market in its own right.

For Mr White, being involved with Loan Market from the beginning has enabled him to make a unique contribution to the broader family-owned group.

“I sort of feel an obligation to live up to the opportunity that I’ve been given. Ray White started the business in 1902, so my great-grandfather, my grandfather, my father have been involved and my brother is involved,” he says.

“I want to make sure that my contribution is worthy of that history."

PROFILE: RIP TO A LEGEND AHEAD OF HIS TIME

The passing of Anthony Wignall in November 2015 sent a wave of sadness through veterans of the third-party channel.

Known affectionately as Tony or Wiggers, Mr Wignall passed away after a lengthy battle with cancer.

“Tony was a lawyer and academic who had a successful career as an investment banker before setting up Wignalls as a national firm that focused on the third-party space. [He was] the first external solicitor to produce NAB legal documents for mortgages. Wignalls was sold to Perpetual later to become First Mortgage Services,” explains Troy Phillips, director of FirstPoint Mortgage Brokers.

Leon Braley, CBA’s senior relationship manager, third-party banking, says Mr Wignall’s work was “way ahead of its time – unbelievable”.

“He was instrumental in writing Australia’s first securitisation program – the PUMA Fund. He had great vision and he was the first one to put it on the table… his intellect on building software programs and writing software programs was incredible,” he says. 

Jon Denovan, a partner with law firm Gadens, adds: “Tony Wignall was one of the major reformers of mortgage doc prep in Australia. He invested a huge amount of energy and knowledge into developing IT systems when Google was still a dream.”

2004: KEY EVENTS

Mortgage Choice lists on the ASX.

GE Money acquires Wizard Home Loans, with the price tag reportedly between $400 million to $500 million.

In September, Sintex is established as a commercial lender. Subsequently moves into SMSF and residential lending.

2005: KEY EVENTS

In March, LJ Hooker Home Loans launches its first franchise.

Financial services education provider Kaplan Professional enters the Australian market, through the acquisition of several vocational and higher education companies.

Lender Loan Ave is founded.

PROFILE: A PROPOSITION TOO GOOD TO REFUSE

For Michael Russell, the broker channel is all about choice...

Like most of his contemporaries, Michael Russell began his career in banking but was mesmerised by the possibilities of the fledgling broking industry and found the proposition too good to resist becoming a part of.

“I loved home lending, I loved doing home lending and small commercial lending when I was in the banks and got a lot of satisfaction from it. But like a lot of people, I saw where the industry was heading,” Mr Russell explains.

“I loved the proposition that brokers were providing…I really could see an exciting future for the industry and I wanted to be part of it, so I jumped on board – it was a no-brainer for me.”

That was at the turn of the millennium, and over the next 15 years, Mr Russell spent considerable time and effort building the profile of the industry and assisting individual brokers build their own businesses with both Choice and Mortgage Choice.

“We were all just finding our feet, so we were all focused on two things: one was recruiting brokers to gain a position of size and scale, and the other was to really sharpen our value proposition to these brokers,” he says.

“From probably 2001 to 2010, technology systems were heavily invested in by the head groups and really sharpened up as effi cient, valuable tools for brokers to conduct their business.”

That proposition and the technology support systems being developed elevated the status of the broking channel not just for customers but as a source of employment, according to Mr Russell.

“I know many brokers within both Choice and Mortgage Choice, many franchisees and loan writers, that were customers of mortgage brokers,” says Mr Russell.

“It’s a great story – it really validates the strength of the proposition that these mortgage customers were that impressed with the proposition, that they decided to jump on board. Not only impressed, but they were really invested in what the future of the industry could look like.

"They were very visionary."

2006: The Aussie way

Just as its establishment as a non-bank lender made waves in the home lending market in the 90s, Aussie’s decision to shift its focus to mortgage broking from 2002 and to become a retail and franchise brokerage in 2006 saw it add significant weight to the broker channel.

Whether working with the Aussie group or as a competitor, brokers benefited from the industry clout and consumer awareness of the Aussie brand entering their ranks.

“During those years as a non-bank lender, we knew we had built this trusted household brand, strong distribution capabilities along with some of the best people in the industry, but we realised that with just one product, we would never be able to truly leverage these assets,” explains Aussie’s CEO James Symond.

“John Symond personally had a view that it was also more risky to keep all your eggs in one securitised basket than it was to spread them out across other lenders as well, and that proved to be correct obviously with the commencement of the GFC and the huge hit securitisation received.”

Yet it was Aussie’s unexpected swoop on the Wizard Home Loans business in 2009 that cemented Aussie Home Loans as a dominant force.

“They had some good people, they had some good stores; we had an opportunity to purchase the business and give our retail channel a boost. And that’s exactly what happened,” Mr Symond says.

“So our 24 stores turned into nearly 100 stores virtually overnight.”

2006: KEY EVENTS

Aussie expands into franchised retail broking.

In November, Interstar Wholesale Finance is rebranded to Challenger following the merger several years earlier.

Finder.com.au is launched as a comparative tool for consumers across financial services and utilities.

Commercial lender Thinktank is established.

2007: Making friends with the media

While a bit of shameless self-promotion never goes amiss, it is fair to say that brokers as a collective had a difficult time with the media in the early years, and the establishment of an online trade magazine for the sector represented something of a new beginning for the channel.

As well as recognising the sophistication of broking as an industry to warrant its own publication, The Adviser provided a national, independent voice for brokers to communicate among themselves about their industry and its partners, as well as receive timely news feeds about issues impacting their businesses and their clients.

Within a matter of months, it moved into print as well – recognising the significant broker demand for quality news and information.

“The trade publications have been a really important part of the framework in building professionalism and getting good stories out there about how the industry is operating,” says Matt Lawler, the head of Yellow Brick Road.

“At one end, there’s showcasing of information and updates so that everyone operating in the industry has access to information in real time. There’s also a lot of best practice encouragement from the trade publications.”

Loan Market’s Sam White says that at its most basic level, increased engagement with the media has helped boost the profile and positivity of the industry.

“A big part of the evolution of broking was getting consumers to understand that this was not a lender of last resort – that brokers could empower customers to make the right decisions,” he says.

“I think brokers were seen in a very positive light by being the person who was going to fight for the customer.

“Media publications like The Adviser have had a big impact around the professionalisation of the broker workforce – having a more informed broker has made brokers better for their customers.”

2007: KEY EVENTS

nMB expands its reach through the acquisition of aggregator Mosaic Financial Services.

Yellow Brick Road is established, initially as a combined financial solutions practice for high- net- worth individuals.

Brokerage MoneyQuest is established by industry veteran Ross Begley.

The Adviser launches in May as the first online news publication for the mortgage and broking industries.

GFC: THE ULTIMATE TEST OF FAITH

The GFC came as something of a shock to virtually everyone, as a spectacular housing bust in the US spun out of control and quickly enveloped the entire world.

Lender closures, mass job losses, restricted credit access, haemorrhaging house prices and plummeting economic growth became the new norm.

A quick flick through our list of events in 2008 and 2009 shows a sharp arrest in new business launches, with activity instead turning to consolidation.

Indeed, one prominent industry spokesperson at the time labelled smaller aggregation groups as “dead men walking”.

But here and now with market share sitting above 50 per cent, it’s all too easy to forget that at that time, there was a very real possibility the broker channel could have died altogether.

“The GFC was quite significant – it really allowed brokers to come to the fore in finding finance for people, because some of the banks had stopped lending. But at one stage there, it could have gone either way; a lot of banks pulled back, very sharply,” says Kathy Cummings, then the head of broking and mobile banking at CBA.

“I think that was a shock to a lot of brokers, to find just how much the first thing some of these banks did was cut the funding to their broker channels.”

Loan Market’s Sam White agrees that things looked dire for the broking channel.

“I used to go to meetings with banks in 2008-09 and I would go in thinking ‘We might not have a business at the end of this meeting’, because we were concerned the banks would say ‘Guys, the deal’s off, we’re cutting costs, we’re not going to deal with brokers anymore’,” he says.

What everyone in the industry agrees on is that it is testament to the resilience, dedication and tenacity of the broking industry that it pushed through, adapted to the new environment and went on to flourish better than ever.

“The industry showed remarkable resilience to dust itself off: it didn’t capitulate, we didn’t see a huge loss of brokers,” recalls Michael Russell, the former CEO of Choice and Mortgage Choice.

“The only good thing to come out of the GFC was brokers have really embraced this concept of concentration risk and diversification – most broking businesses were one-trick ponies in terms of being solely one-product businesses. This concept of concentration risk really hit home and you’ve now got this really exciting diversification theme washing over the industry."

2008: KEY EVENTS

As the fallout from the GFC unfolds, a wave of mergers and acquisitions occurs – among both lenders and brokers.

One of the biggest takeovers was Westpac’s $18.6 billion acquisition of St George Group.

In August, CBA takes a onethird stake in Aussie, paying $71 million.

CBA buys Bankwest in October.

After several years of lobbying and discussion, the first federal steering committee on establishing a national set of regulations for the broking industry is formed, which goes on to develop what we know as the National Consumer Credit Protection Act (NCCP).

2009: KEY EVENTS

Westpac is the first major bank to drastically cut broker commissions. All lenders follow suit, by up to 30 per cent or more in some instances, as lenders suffer through the GFC.

Early in the year, crisis-hit GE Money offloads Wizard Home Loans to a cashed-up Aussie – the deal sees Aussie grow from 24 retail franchises to 123. CBA purchases a large portion of Wizard’s loans as part of the deal. The undisclosed sale price is understood to be a fraction of that GE Money paid for the business just five years earlier.

Having been trumped in its bid to acquire Wizard Home Loans, NAB subsequently completes the acquisition of Challenger in October, including its mortgage funding business and of course aggregators Choice, FAST and PLAN for $385 million. The Challenger business is rebranded to Advantedge.

Mortgage aggregator LoanKit is acquired by Mortgage Choice.

Astute acquires boutique franchise group Australian Mortgage Brokers.

Back to the beginning: Part 2
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