Brokers looking at the Australian market from abroad say change should not be feared. Tas Bindi speaks to international brokers to get their perspectives on what’s happening in Australia.
Recent events in the financial services industry, such as the Hayne royal commission and other inquiries, are expected to have some impact – whether positive or negative – on the way broking businesses operate. But businesses need to learn to act without certainty about what will unfold, as future challenges cannot
be clearly defined.
One of the biggest concerns in the Australian broking industry is the potential abolition of trail commissions, which account for half of a broker’s income. However, in some international markets, brokers have successfully operated 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.
Darren Cantor, the managing director of Mortgage Advice Bureau (Australia), says that in the UK, not only do brokers not earn trail, they also earn about half the upfront commission paid in Australia.
“A broker in Australia could typically earn 0.65 [of a percentage point in upfront commission] and 0.15 [in trail commission], give or take, depending on the lender. In the UK, it’s 0.30 [upfront] with no trail,” Mr Cantor explains.
Meanwhile, New Zealand went through a “no trail” period starting in 2006, when payments went from 0.65 of a percentage point in upfront commission plus 0.20 of a percentage point in trail commission to an average of 0.85 of a percentage point in upfront only.
However, according to Bruce Patten from Loan Market New Zealand, this remuneration model increased churn, prompting some lenders to return to the old model, paying between 0.45 to 0.60 of a percentage point upfront and 0.15 to 0.20 of a percentage point trail.
Currently, two of the big four banks (Bank of New Zealand and Westpac) pay both upfront and trail commissions, while the other two (ANZ and ASB), along with smaller lenders, pay only upfront commissions.
Somewhat similar to Australia, broker remuneration in Canada is based on the term of the loan (i.e. the longer the term, the more basis points paid) and a “mortgage advance”. Canadian broker Janet McKeough from Success Mortgages says the average commission is about 0.80 of a percentage point for a five-year term.
Further, depending on the volume of loans a brokerage sends to a lender, Ms McKeough says additional volume bonuses may apply, which can be an extra 0.10 to 0.35 of a percentage point.
"Compensation hasn't significantly in recent years, with the exception of trailer fees being provided by some lenders and being considered by others,” the Success Mortgages broker says.
“This has been a motivating factor for some brokers and not for many, as most prefer to get paid full commission upfront. Trailer fee commission is generally [0.65 to 0.75 of a percentage point] upfront versus [0.80 of a percentage point] plus volume bonus.”
Scarcity boosts productivity?
According to Mr Cantor, the economics suggest that brokers in the UK, who have a collective market share of about 70 per cent, have to do more to earn a comparable income to an Australian broker.
“[In Australia], we’ve got 25 million being serviced by between 16,000 to 17,000 brokers. In the UK, you’ve got over 60 million people being serviced by
about 11,000 brokers,” he says.
The managing director notes that across Mortgage Advice Bureau’s network in the UK, brokers write, on average, 10 loans each per month. Whereas in Australia, that figure comes down to 1.5 loans per broker per month.
“UK brokers have to be more productive. They don’t earn as much as we do on a deal, so they’ve got to do more deals to ensure they earn a sufficient income,” Mr Cantor says.
Mortgage brokers in the UK also have a focus on selling insurance, according to the managing director.
“[UK brokers] focus on what income can be generated from that customer more broadly – and that’s where the various insurance products come into it,” Mr Cantor says.
“Across our network [in the UK], approximately 50 per cent of mortgages are sold with some sort of protection in place. That would compare to around 1 or 2 per cent in Australia.”
The managing director acknowledges, however, that this could be because Australians care less about insurance than people from other developed nations.
“It’s well known that Australia is very underinsured, so you’ve got to adjust the customer attitude first,” Mr Cantor says.
“I also think you’ve got to adjust the broker attitude. I think a lot of brokers see selling insurance in Australia as a way to diversify their income. In the UK, there’s no doubt that that’s the main reason, but culturally, they absolutely believe it’s the right thing to do.
“A mortgage is a significant amount of debt. [UK brokers] want to make sure that if something happens to [the customer] or their family, they’d be
protected. They genuinely believe in it in a much greater way than we do here in Australia.”
According to Mr Patten, the decade-long absence of trail commission in New Zealand forced mortgage brokers to diversify their business, expanding into other types of finance, insurance and financial planning to maintain viability.
“The opportunities to do other businesses off the back of a mortgage makes you a more rounded adviser for the client,” the Auckland-based broker says.
The next few years is expected to be marked by significant change, with the role of compliance being elevated following the royal commission and other inquiries.
From a compliance standpoint, Mr Patten says the after-effects of the royal commission have already crossed over the Tasman because some of the financial institutions that were under scrutiny also operate in New Zealand. As such, when banks such as ANZ and Westpac make a credit policy or other change in response to regulatory scrutiny, ASB and Bank of New Zealand tend to follow suit.
He adds that “the paperwork has become ridiculous”.
“All of a sudden, you’re filling out 16 different [forms for one client]... It should be all incorporated in a single document, but they just keep adding on,” Mr Patten says.
“I think for [mortgage] advisers, the biggest frustration is that there is no collaboration amongst the providers. [They’re not saying], ‘Let’s have the same piece of paper because it’s all [designed] to achieve the same thing’.”
Mr Cantor, on the other hand, believes compliance obligations are more stringent in the UK where “there is greater accountability and responsibility placed on brokers”.
“A lot of brokers in Australia see compliance as a real pain point, but when you [compare that to] the UK, I think we have it good in Australia,” he says.
The Mortgage Advice Bureau managing director explains that Australian brokers have to ensure they are recommending a product that is “not unsuitable” for the customer, whereas in the UK, brokers have to place customers into “the most suitable” product.
“To do that, [they] have to go through quite a lot of information… A broker in the UK typically has access to up to 90 lenders,” Mr Cantor says.
“I think we will see the royal commission moving the standard of advice [in Australia] higher to deliver better outcomes for customers.
“History has told us that we do move in the same direction as the UK, perhaps three to five years behind.”
Ms McKeough, meanwhile, says one of the advantages of being a broker in Canada is that lenders and default insurers have “consistent guidelines” nationwide and “strong working relationships with brokers”.
However, the challenge in Canada is that lenders and default insurers are mostly federally regulated, whereas the broking industry is provincially regulated, which means there is a “disconnect”, she adds.
She also admits that brokers are still seen by many consumers as “the provider of last resort” as the industry is still relatively new in Canada.
Rather than fixate on the negative possibilities, such as the removal of trail commission, Ms McKeough recommends that the Australian broking industry see threats as an opportunity to educate the government and regulators.
“One doesn’t know what they don’t know until someone enlightens them. When they know more, they will do better,” she says.
In October last year, the Finance Brokers Association of Australia (FBAA) and the Canadian Mortgage Brokers Association launched a new cross-border organisation, called the International Mortgage Brokers Federation (IMBF), to help influence regulation and legislation through global advocacy.
“Governments need to understand products offered by the financial institutions direct to their clients [are] significantly more harmful to consumers, [such as] credit cards without income confirmation or qualification, unsecured lines of credit being automatic when mortgages are funded, and collateral charges without full and proper disclosure,” Ms McKeough, who is involved in the IMBF, says.
FBAA managing director Peter White said at the time of the launch that the purpose of the federation – which also comprises members from the US, New Zealand and the UK – is also to help foster greater collaboration between member countries, with brokers able to utilise the federation as a “global referral network” should their clients move abroad.
While Mr Patten fears the possibility of overregulation being a consequence of the royal commission – which could make applying for and obtaining loans more difficult – he says the silver lining is that the broker market share will grow.
The Auckland-based broker even claims that the Hayne royal commission has been increasingly driving New Zealanders to brokers, with the broker market share believed to be back above 40 per cent.
“The broker market share has grown… because clients are seeing all the negative stuff come out about the banks. They’re tending to go more to advisers because they feel that they will be better looked after and get more choice,” Mr Patten says.
He expects the same to happen in Australia as it’s difficult for large organisations to implement and sustain changes.
“The biggest problem is big organisations like banks will really struggle to get their staff to understand [the changes that need to be made], whereas advisers have always been able to adapt to whatever market changes there are,” the Loan Market broker says.
“The end result of new regulation is normally a growth of market share for advisers. It’s been seen all over the world.”
Tas Bindi is the features editor for The Adviser magazine. She writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.
Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business.
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