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Bank CEO backs deferred upfront model

by Annie Kane13 minute read
Bank CEO backs deferred upfront model

The CEO of a non-major bank has said that any changes to broker remuneration need to consider the “sustainability” of the channel, arguing that an upfront model split between settlement, the two-year mark and the four-year mark would bring it in line with the BEAR regime.

On Tuesday (16 April), ME Bank held a panel on the Future of Broking in Sydney, moderated by AFR senior journalist James Frost, asking industry representatives what their thoughts were on the current state of the market and what changes could impact the broker channel in the future.

Noting the recommendations regarding changes to broker remuneration in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the panellists were asked what their views were on the changes to commissions and the differing stances of the Coalition government and Labor Party on this front.

Speaking during the panel, ME Bank CEO Jamie McPhee said that the “royal commission was called for poor behaviour in the banking sector”, adding the fact that the resulting recommendations “are going to slam the brokers [and] put the power back into the major banks”, was therefore akin to “a John Cleese comedy sketch”.


“We feel very strongly that you need a remuneration structure that creates a sustainable broker industry,” he said. “That has got to be the starting point.

“ME wouldn’t survive without the broker community,” he added, noting that more than 70 per cent of its new business flows come from the broker channel.

“So, my first point is that you have got to create a remuneration structure that creates sustainability for the mortgage broker part of the industry. Not sustainable for what it was, but sustainable for what it now is.”

He continued: “I think the current structure works. If the current structure isn’t politically acceptable, then find out what the right upfront is that is going to create sustainability.”

The ME Bank CEO suggested that once this figure was arrived at, “you can pay part of that upfront fee [on settlement] and then you put a deferred part of that upfront fee for two years and [another at] four years, which would get paid if the loan is still with that borrower and not in arrears”.

“Because that, I think, would be a pretty good test that the loan was not unsuitable/was suitable for that customer,” he said.

Echoing calls made by the Loan Market executive chairman to move to a new deferred upfront model, Mr McPhee outlined that lenders currently pay around 65 basis points upfront [at settlement] and then 15 basis points for trail.

Noting that the average life of a mortgage was around four years, he said that lenders could instead “pay a 125 [basis point] fee upfront total, where you could actually pay 65 basis points of that upfront [at settlement] and 30 basis points in two years’ time and 30 points in four years’ time.

“That is not inconsistent with the Banking Executive Accountability Regime, which is actually deferring the same thing in relation to bonuses,” he said.

“So, I think there is a precedent around that.”

In conclusion, the bank CEO said: “I don’t think today’s remuneration structure is broken. If it is not politically acceptable, [this] is a potential alternative that would work.

“But the people in the room [i.e. brokers] will understand the cost that is going into that business. And I really believe they need to be invited into the discussion and debate, because we need a remuneration that creates sustainability for the broker industry, no question.”

‘Who else is going to do that for them?’

Speaking from a broker perspective, Mortgage Success principal Katrina Rowlands outlined that trail enabled her to service clients before applying for a loan to get them mortgage-ready, as well as continue to offer services post-settlement that were non-income producing, which she suggested bankers would not do.

"Those clients have been clients of mine for a long time, and out of respect of that relationship and the fact that I have had trail on that loan, I do all of those files even though they are non-income producing and, in the current environment, will take weeks of management to do. Who [else] is going to do that for them?”

She also noted a client who was recently widowed and wanted to remove her husband’s name from the title deeds. “Who is going to help her? It’s a non-income earning transaction.

“[Trail] allows me to maintain that client care and it still comes down to me. It’s the client’s best outcome. So, if the trail and the current remuneration isn’t broken, and consumers don’t want it... the broker market doesn’t want it, banks don’t want it. Why is the decision being made?”

Noting that trail was being removed in financial advice space, Ms Rowlands emphasised that financial advisers investing money for clients were helping clients to make money, and therefore it made sense for the client to pay for it.

“When we do a home loan with the lender, the lender makes money, so they pay for it. The question of who is the end user and who gets the end benefit? Yes, the client is getting the benefit, but it is the bank or the lender who is making the money.”

She concluded: “Financial planners are dealing with people who have money, we are dealing with people who are borrowing money…

“Every week, something can happen to a borrower that can affect them actually being able to live in their home. I think it is just resounding that when something happens and they need help to maintain a life in their own home, that they have somebody to turn to who will be there to support them. And not at that point say: ‘I know you are down, I know you are in a really bad place, but there is an hourly rate and can you pay that upfront for me?’

“I could never leave my clients in that situation,” she said.

The conversation around the future of broker remuneration has been a key point of focus for the broker channel since the release of the final report from the banking royal commission, and is coming to head given the two major political parties have differing stances on the future of broker remuneration and the country faces a federal election next month.

[Related: Industry advocating for new upfront structure]

me bank panel
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