Standardising the rate of upfront commission paid to brokers may be a potential solution to conflicted remuneration, the CEO of a non-major bank has said.
Speaking to The Adviser following the release of Suncorp Group’s 2019 half-year (HY19) financial results, managing director and CEO Michael Cameron renewed the group’s proposal for standardised rate of commission paid by lenders to mortgage brokers.
When asked if he would support an increase to upfront commissions if the federal government pursues its plan to phase out trailing commissions, Mr Cameron touted the introduction of a remuneration model with a “level of consistency” regardless of “who pays what to whom”.
“One of the parts of the solution may very well be to put in place level payments so that regardless of where the loan goes, the payment is the same,” Mr Cameron said.
“That’s an idea worth considering but there are a whole lot of other things around transition and how you structure that, which is important.”
Mr Cameron acknowledged that brokers are “critical” to Suncorp’s distribution channel and expressed concern over the potential impact that changes to the broker model may have on competition in the banking sector.
However, in light of Commissioner Kenneth Hayne’s call for a legally binding “best interest duty”, the Suncorp CEO backed reforms that would ensure brokers work in the “best interests of the customer”.
“As long as there’s no more market power given to the major banks, as long as customers get more choice, more transparency, are treated fairly, and there’s no conflicts in the remuneration, then we’ll be happy,” Mr Cameron added.
‘Longer than normal’ servicing times via brokers
In its HY19 results, Suncorp Group has reported that its bank’s home lending portfolio grew to $48 billion as at 31 December 2018, an increase of $1 billion (2.2 per cent) from $46.9 billion in HY18.
However, in comparison, Suncorp’s mortgage book increased by 6 per cent from $44.3 billion in the 12 months to December 2017.
Suncorp partly attributed slower lending growth to “longer than normal” processing times through the broker network amid tighter credit standards.
Despite acknowledging the impact of slower processing times, Mr Cameron told Mortgage Business, sister title of The Adviser, that the group remains committed to its existing home loan assessment process.
“The processing issue goes to the heart of our early implementation of what I describe as responsible lending,” Mr Cameron said.
“I think when you’re assessing a loan on behalf of a broker, you can do it very quickly and increase the risk profile and put at risk the outcomes for the customer or you can actually take some time and look at the capacity of the people to repay the loans, their spending patterns, their savings patterns, and those sorts of things.”
“To do that properly takes time, and typically, to do it properly takes longer than maybe some other organisations.”
The Suncorp CEO said he expects competitors to adopt similar assessment processes in the near future.
“I think sooner rather than later, the rest of the industry would catch up and align themselves with those stricter responsible lending rules, which would be good for the industry.”
Suncorp also attributed “moderating lending activity” to external factors, including the slowdown in property market activity, which Suncorp said is likely to “intensify price-driven competition”.
The non-major predicted that market dynamics would “continue to be impacted by industry-wide implementation of tighter lending criteria as well as reducing property investor confidence”.
According to the bank’s HY19 results, owner-occupier loans make up 72 per cent of the bank’s mortgage portfolio, with investor home loans accounting for 28 per cent.
Further, 79 per cent of loans in Suncorp’s mortgage book are tied to principal and interest repayments, while interest-only loans make up 21 per cent of its portfolio.
Additionally, as of 31 December 2018, 78 per cent of home loans in Suncorp Bank’s portfolio were settled with a loan-to-value ratio (LVR) of less than 80 per cent, compared to 22 per cent of mortgages with an LVR of more than 99 per cent.
Slowed lending growth coincided with a $9 million (-4.7 per cent) reduction in Suncorp Bank’s net profit after tax, from $191 million in HY18 to $182 million in HY19.
The group’s total net profit after tax fell sharply, dropping by 44.7 per cent from $452 million in HY18 to $250 million in HY19.
Mr Cameron attributed the drop in the group’s underlying profit to natural hazard insurance costs “significantly above” the group’s allowance and “volatile investment markets”.
[Related: Non-major supports Hayne’s proposals]