Hayne gets it wrong on mortgage brokers

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Section 2.2 on page 70 of the Royal Commission Final Report says:

“The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing. Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?”

Recommendation 1.3 says:

“The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.”

The Royal Commission has certainly put a blowtorch on the practices of some of our banks and financial institutions but that was hardly a revelation. Many people, including myself, have been writing about them for years. Default interest on loans in arrears and shonky insurance policies for credit cards are just two examples.

But the blowtorch is particularly hot on one section of the industry: mortgage brokers, who account for over half of all residential home loans settled.

Mortgage brokers and payment preferences

The proposal to ban trail commissions for mortgage brokers concerns me. While this has been welcomed in certain sectors, there is a general ignorance of the purpose of trailing fees and how they work. It’s a quirk of human nature that most people have no problem with expenses that are deducted but hate to receive a separate invoice. The classic case is the group certificate and personal income tax. Nobody seems to worry when $20,000 is deducted in tax, but they will scream if they are asked to write a cheque for $500 to the tax man.

When the financial services industry was in its infancy, the main remuneration was by an upfront commission. The problem with this was that the business had no recurring income and was solely dependent on chasing new business just to stay afloat. This also created the problem of how to charge a person who wanted ongoing advice from time to time.

It was unsustainable and eventually upfront commissions were cut and a trail fee introduced in lieu. This gave the business a basic income to rely on, while enabling it to provide ongoing service to their clients without issuing a new invoice. This is a different model to say a law office who will charge up to $49 just to open an email.

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Personal experience

I received a great insight into the mortgage broking business last month when I was researching borrowing for the family home. The options were overwhelming, the criteria for loan eligibility were inconsistent and confusing, the loan rate varied from lender to lender and the pick for the most suitable lender often turned on whether the borrower could meet certain eligibility criteria. My conclusion was to go to a mortgage broker – it’s too hard to do it on your own.

The mortgage broker told me that on a $400,000 loan, he would receive an upfront commission of 0.6% or $2,400 paid for by the bank. It could be clawed back if the loan was paid out within three years from establishment. The lender would pay the broker a trail fee of 0.15% or $600 a year as compensation for providing advice to the borrower as needed.

This could include advice about moving to a fixed rate, managing a change of employment or a move interstate by the borrower, negotiating a better rate with the existing lender instead of changing banks, and checking the best way to finance a change in residence or the acquisition of an investment property.

What might happen now?

The Royal Commission has recommended that this system be scrapped, including both upfront and trail commissions. Applicants who wish to use a mortgage broker will have to pay an upfront fee, and if they can’t pay, it could be added to the loan!

Well, you know what’s going to happen. No young couple looking for a loan will be prepared to fork out over $2,000 to a mortgage broker to research the market and find out the best deal. Instead, they will go online to look for what appears to be the best deal and jump in.

The banks will have a field day. Without a mortgage broker as an intermediary to keep them honest, the hapless borrower will be at their mercy. Expect a return to establishment fees and even more complex products.

When the Royal Commission was taking place the values of bank shares were slashed. It speaks volumes that as soon as the market opened after the release of the Final Report, bank shares were up around 5%. I rest my case.

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance, which can be found on his website noelwhittaker.com.au

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52 Responses to Hayne gets it wrong on mortgage brokers

  1. Jason March 12, 2019 at 10:44 PM #

    Looking at the loans that friends have got through brokers recently, the are about 40 basis points higher than the deal I am stitching up with a lender directly. The comparison rate is your friend and helps you compare apples with apples.

    Really financial planners, brokers and tax agents should be the one person. I like to think a financial practitioner that looks after your financial health just like a GP looks after your health. We would all pay for that. It could be assisted with a government rebate and more complex cases could be referred to a tax specialist,

  2. Sam Sattout February 23, 2019 at 11:48 AM #

    Well explained Noel Whittaker!
    Does Shorten know anything about brokers and how they operate and how much time and stress they save their clients?
    Do the politicians want the rats in charge of the cheese shop? Keep the rats (banks) away from the cheese!

  3. Kerrie February 17, 2019 at 9:22 AM #

    If you get something for nothing that something favors who ever pays not you. Haynes was right you need to pay if you want mortgage brokers to work for you not the lenders.

  4. Gerard February 10, 2019 at 9:09 AM #

    One of my concerms about the RC was that we would have a few lawyers deciding (poorly) how an industry should work even though they have zero real industry experience. That may be the case with the mortgage broking industry. I can’t see how the proposed changes will do anything but reduce competition; which will in turn mean increased market share and margins for the Big 4 banks. Regarding the Netherlands model… If consumers wanted to pay an upfront fee for service I’m sure we would already have a number of mortgage brokers operating on this basis. Here’s an idea… Why don’t we just let the consumer choose?

  5. Jim February 10, 2019 at 7:45 AM #

    The only people against the cutting off the trail commissions gravy train are mortgage brokers and their cronies !!!!!

  6. DJ February 9, 2019 at 7:26 PM #

    Let’s not forget competition in the market and what brokers have done in lowering rates across the board by providing access and distribution for a huge number of smaller lenders!
    Do you think rates would be as low as they are if brokers are removed from the market ? What do you think the banks will do when they have their monopoly back and have cleverly orchestrated the removal of most of their competitors?
    Don’t fall for it people ! Don’t play into the banks hands and hang brokers out to dry like they are desperately and slyly trying to do. Ask yourself why they are ? It’s so they can increase their margins again and make more profits !!!
    Banks and all lenders don’t have to pay brokers and don’t have to deal with them.
    They do because it’s very cost effective for them and much cheaper than paying their own lending managers.
    Decimating and demonising brokers will result in the industry disappearing. It will dramatically increase the distribution costs and getting loan for which you will pay for and allow the big banks to make huge amounts more profits.
    The current structure has been proven to work and work extremely well.
    Lender margins are lower than ever = better rates for all and the percentage of people using brokers increases year on year to now 60%
    Absolute proof that the industry works and is a true win win for everyone!
    Hang on, maybe that’s why the banks want it shut down ?

    • Ian Bradford February 12, 2019 at 12:16 PM #

      I agree entirely!

      For those who think brokers shouldn’t receive commissions, who do you think is going to pocket the savings?

      Do you think the banks are going to offer you a better mortgage rate because of the savings they make? Clearly the right thing for the banks to do would be to offer their longest serving customers the best mortgage rate (a loyalty bonus), but we’ve all seen how well that works out!

      When you find out your bank is offering a better rate to new customers (and won’t match it for you), are you going to be prepared to pay a broker $2000 or more to find a better deal for you? And you can bet the banks will make the energy companies look like amateurs when it comes to making comparisons ever harder too.

  7. Paul Hamilton February 9, 2019 at 7:19 PM #

    Christopher Sharpe, if that was your business it would be very profitable. The fact is that the average broker earns $86k p/a. The assumptions don’t take into account that the average loan is only 4 years, which means trail stops, you need to pay aggravation fees, insurance, if you work for a company they will also take some margin to pay for marketing, insurance, licensing etc etc.
    the reality is that most brokers will only write 3 out of 10 loans which means that if our industry didn’t exist all these scenarios would need to be responded to by the bank. If the bank also picked up an additional 60% market share this means that they would have additional significants costs to provide this service. Matt Comyn, CEO CBA states in the RC that they would only save $39m per annum if they didn’t pay brokers.
    So, if they have all these additional fixed costs which $39m won’t cover, what do you think will happen to the interest margin and fees in relations to our home loans?
    In November 2018 when the new complaints body was launched there were approx 6550 complaints of which 0.5% related to brokers. For a group that has 60% market share that is sensational.
    Why are we so hell bent on changing something that is not broken?

  8. Think February 8, 2019 at 12:22 PM #

    I had the same initial reaction so was intrigued enough to read this section of it in full. I think the article ignores the complete set of recommendations and the problems they are trying to address.

    The Commission found people were not always getting loans that were best for them but rather the broker (and simply adding the best interest duty in isolation, as evidenced by the Financial Advice phase, was not enough).

    It also found we all (whether you use a broker or not) ultimately pay more for our loans in the current structure. If a fee was paid for from the loan (like many accountant’s fees are from tax returns) it isn’t the doom a gloom many predict but it is the end of easy money.

    The full report is insightful for those who have the time to read this section of it.

    Nevertheless I don’t see the mortgage broker commission regulations happening in the country we live in.

  9. Malcolm Campbell February 7, 2019 at 7:50 PM #

    Why should the mortgage broker industry expect to receive both an immediate and recurrent income stream? What is wrong with them competing and searching for new business? Numerous other professions and trades have to do exactly that to earn a living. My son is a qualified builder and has to find and compete for each and every job. He would be delighted to get paid $2400 for a job and $600 p.a for the next 25 years to provide ongoing advice and to provide himself with a recurrent income. OK, recurrent advice from a builder is not required but how many mortgage brokers provide some annual follow-up for their fee and does the client get $600 of value from this advice every year?

    • Kyle February 7, 2019 at 10:38 PM #

      Hi Malcom,

      I always appreciate everyone’s opinion and more importantly, taking the time to contribute to the discussion.

      But are you aware of the following?
      1. Mortgage brokers settle more than 50% of the mortgage market creating competition and lower rates for consumers?
      2. When APRA introduces new lending guidelines on investor loans, it affected..
      – consumers (interest rates increasing by almost 1% PA)
      – customers couldn’t refinance their loan(s) due to new servicing / income assessment changes by APRA ($500,000 @ 1% = $5,000 PA in interest to the banks)
      – developers couldnt settle or sell their stock to the public due to tougher lending (introduced by APRA).
      – developers do also contract their work to builders which get paid as a by product.

      One point I don’t know if you’re aware of, based on your son being a builder, the economic effect to him could be either little or substantially (meaning if less new properties sold / constructed, it means less work for your Son and income for his family). What are you thoughts?

      Next point about ongoing trail.
      Yes, you have a point about paying an ongoing fee if a service is delivered. My next points I want to bring forward to you are as follows…
      – if I could save you an extra 0.5% on your mortgage ($300,000 loan = $1,500 PA) based on what you have now and you don’t have to pay me any upfront or ongoing service (as trial is paid to the broker to help support enquires) would you do it?
      – most lenders can help you get into debt, but what if a good mortgage broker can help you pay your mortgage off faster (again, saving interest and time you have to work to pay the mortgage) without paying a fee and they continue to help you year on year to ensure the loan is working for you?

      I don’t know if you’re aware, there is so much we (and a lot of brokers) do for our clients.
      – increases or loan variations,
      – substitute of security (sell and buy).
      – negotiate better rates with existing lending if your financial position improves (creating less risk for the lender).
      – so much more which cost us more than the trail we have collected.

      When anyone publicises information, I encourage everyone to look at fine print, ask the right questions, converse with the right industry leaders so you can then make an informed decision.

      I am concerned for your Son Malcolm. We all need to be asking more questions to ensure the consumer is protected and that if the public wishes to use a broker or not, that the borrower knows what they’re getting themselves into.

      • Malcolm Campbell February 8, 2019 at 11:13 AM #

        Hi Kyle

        The Mortgage broker industry obviously provides a valuable service with a large % of mortgages being organised by brokers. It facilitates mortgages for those with a less attractive financial history to potential lenders and it negotiates better interest rates and keeps the lending industry competitive.

        With a current average mortgage of $400K and an upfront brokerage fee of approx. 0.6% ($2400), the question is, would I use a broker if I had to pay this fee rather than the lender. This is really a simple financial calculation. If the broker saves me 0.6% on my interest rate, the fee is paid back in 1 year, a saving of 0.3% requires 2 years. So the maths says YES. The problem, of course, is that unless I have hit the phone or the internet myself, I can never be certain I got a lower interest rate. I am sure brokers could provide plenty of data etc., to illustrate their knowledge and negotiating skills. So will the mortgage industry survive, logic again says YES but probably in a more consolidated form.

        Trailing fees, of course, are not unique to mortgage broking. Trailing fees get paid to “financial advisers”, intermediaries that arrange investment in managed funds. Now that really is “money for nothing” as you never hear from the arranger ever again. It is hard to envisage why someone would need to make changes to their mortgage arrangements every year and how such changes can continually be financially beneficial to the borrower.

        So I sincerely hope the mortgage broking industry continues to prosper but not based on long term receipt of trailing fees for dubious annual advice.

  10. Phil February 7, 2019 at 4:18 PM #

    If there is any value, and I think there is, in reviewing the loan annually with a broker, why can’t it be a fee, invoiced by the broker, paid by the client. Why does it need to be a % of the loan?

  11. Pavle February 7, 2019 at 3:37 PM #

    To avoid any conflict of interest, there should be a complete separation between advisers’ income stream source and the product they had advised about.

    I do agree there is a value in engaging mortgage broker, both short term to get optimal terms, and long term to keep lenders honest. While I agree with a view about the quirkiness of human nature related separate invoice, the client could, if so preferred, borrow to pay for the advice. The net effect should the same.

    Mr Whitaker writes that the problem with the upfront commission was that the business had no recurring income, which was unsustainable. The advisers could have invested the upfront commission to generate that recurring income, probably better than the rest of us. The repeated business (recurring revenue) is achieved by providing quality service and ensuring your customer is aware of it.

    Also agree, there are industries other than finance that deserve being looked into with greater scrutiny to remove any unethical behaviour (e.g. health, legal).

  12. Martin Beanland February 7, 2019 at 2:41 PM #

    Spot on. Upfront fee and deferred upfront fee. Broker aggregator makes gross (pre-costs) income of $5,000 which is half now and half over time …. A bank makes margin on funds (between cash rate and home loan delivery rate) of 2.5% less broker commission – so the bank makes gross precosts income 1.85% upfront (first year $7,400) and 2.35% pa for say next 3 years ($9,400pa x 3 = $28,200 in trail to bank)… so total commissions payable broker @$5,000 and bank @$35,600 …. ok so we need to reduce commissions where? And better add a fee to the client as well. huh?

  13. Jay February 7, 2019 at 2:28 PM #

    I think everyone has forgotten that people can go online and use comparison websites like Canstar, Finder and RateCity to get a home loan. Everything is going digital

    • Noel Whittaker February 7, 2019 at 3:21 PM #

      Yes – people can do that – but often they are not comparing apples with apples. I am just researching an article on borrowing for a house and after speaking with a mortgage broker I was amazed by all the issues that need to be considered.

      • Don Macca February 7, 2019 at 4:51 PM #

        Hi Noel
        i will be keen to read your article on borrowing for a house
        If you want a moderate loan & you need it within a month forget going to the bank. Go to good mortgage broker. He will give you information that would take an inordinate of time for you to source. Your application will be replied to much quicker
        All the pontication from those who probably never had to make a loan application.
        Unfortunately not all brokers act in the best interests of clients this mainly concerns supplying false information to the banks. Who in some cases are are happy to accept knowing it is incorrect. The brokerage industry & the banks have not been diligent enough in removing them.
        My advice go to a broker if you need a home loan. Picking on that has a network of is possible your best choice

      • Tony February 7, 2019 at 7:04 PM #

        Noel, that’s because a broker’s role is to confuse you so you become reliant on them.
        As a long time financial planner. you know that advice is needed for complex issues, like superannuation and investing, but not mortgages or term deposits.
        Their day is done!!

      • Gavin February 7, 2019 at 11:25 PM #

        Noel, if we suggest the remuneration reward for a mortgage broker is influenced/based upon on their ability to remove/untangle complexity, I can only assume this also opens the pathway for the legal fraternity to reconsider conveyancy costs associated with residential mortgages. The complexity attached to the legal task is generally higher & the consequences of poor performance far outstrips that of a typical mortgage solution. Interestingly professional legal fees is an upfront cost that a purchase borrower incurs & although no one enjoys paying lawyers, it is deemed acceptable.

        I have not heard of any suggestion that a reduction in market size/# of mortgage providers in market is going to shrink. Market depth drives competition and this is what needs to be protected & demanded from our regulators. History shows the advent of competition within the banking/lending sector was the key catalyst for improved consumer pricing & in many ways we can thank Big John & Aussie for this.

    • Anthony February 7, 2019 at 3:33 PM #

      Jay – You are correct where the application is vanilla (>20% deposit, high income, stable long term employment, limited existing debt and security property in prime location). However anything outside of this, comparison sites are useless. The additional risk is the average consumer has no idea of structuring implications. Believe it or not, interest rate is of only secondary importance when it comes to choosing the right product. Policy and product features come first.

    • Paul Ballinger February 8, 2019 at 10:46 AM #

      One thing people don’t understand about brokers is we don’t just compare rates and fees, we look at each customers requirements and match that with the policy of the lenders. Every lender has a different appetite and the digital space does not look at policy. I have no doubt that the commission model will change, what that looks like I dont know but to bill the client is not a viable option, it delivers a bigger market share back to the Big 4.

      So many people forget what happened 29 years ago when we had Building Society’s as a competitor to the banks, when Pyramid went down and took out the industry the big 4 absorbed them and grew market share and consumers were the looser. Brokers and some smaller lenders filled the gap.

    • Brendan February 8, 2019 at 10:10 PM #

      Great comments here. My 2 cents….
      – The majority of brokers are good at what they do and DO work hard for their trail commissions. My broker contacts me at least monthly when the RBA meets. Loans are reviewed semi-annually and if my bank raises their rates, I get a list of comparisons from other lenders incase i want to switch.
      – Builders will suffer terribly if the broker industry is impacted too much. A lot of lenders have stepped back from construction lending, major renovations and alike. Good luck finding out which ones on loan comparison sites.
      – There are bad brokers BUT their longevity in the industry is limited anyway.
      – Comparison sites have their place, however, they only compare price. They dont often/accurately compare policy, application process, time frames or ongoing service from the lender of choice.
      – Banks/Lenders are valuable. All of them. What will happen to the smaller lenders if brokers disappear.
      – Yes, I’d pay a fee for my broker… but with my complex financial position, I’d need to pay a fee every time I restructured, refinanced, varied or repriced one of my loans. Not optimal.
      – I’ve been a big 4 bank customer my whole life until a few years ago. Why did I change?? They forced me to… I would have never looked for a broker until my bank increased my rates by over 0.6% in 2016 when other lenders were dropping their rates and the RBA was holding the rates steady. Tried the other big banks. Let’s just say I didn’t get the service I was used to. Not bagging them, by their own admission, the branch lending staff were “not experienced” enough to handle my enquiry. After 3 months of trying, I met my broker at my kids soccer game. In 15mins he had a solution and the following day (a Sunday) he took my application to lenders I’d never thought of before. Restructured the loans and spread them between two different lenders. I saved $11000 in 1 year.
      – “Brokers job is to confuse you” what planet are you from.
      – Conveyancers/Solicitors can and do receive recurring income. Mine does…. I get a bill every month for phone calls, emails, letters regardless of receiving advice or not.
      – Malcolm/Gavin – thanks for your educated comments. I dont completely agree but respect your opinions. I think you both should find a good broker and see how dedicated they are to your financial future.

      Last point…. if you think I’m bias…. I work for the same big bank that raised my rates.

      • Paul Hamilton February 9, 2019 at 7:05 PM #

        Well said Brendan.
        The current proposal is that everyone will pay an upfront fee to the bank or broker (not just broker). I can’t see how this provides any benefit to the consumer when the bank currently pays this fee.
        I run a reasonably sized mortgage business in Perth. I just completed an analysis of which lenders we used over the last two years. The results were:
        1. We used 28 lenders
        2. 89% of the business we wrote was concentrated to 10 lenders.
        3. 9 of the 10 lenders paid the same rate of commission 0.60% upfront and 0.15% trail. The only lender that paid more was BankWest (11% of business) who paid 0.05% more but they weren’t paying trail in year one.
        These stats show that we are not driven by commission but by the needs our clients and the circumstances they find themselves in.
        Most people are reluctant to switch banks unless they will save $3k plus in interest p/a. Adding an additional fee on top would mean that people would limit refinancing to a better deal and banks introduce ‘rate creep’, it happens!

  14. Greg February 7, 2019 at 2:00 PM #

    Spot on Noel. A very good article. Now all that will happen is that upfront fees will increase, with a claw back if the loan is paid early. The trail commission is just deferred consideration anyway.

    I had no interest in using a mortgage broker at first but no-one in the bank would talk to me. They did not have the infrastructure. My broker is fantastic. It is just not navigating through the increasingly opaque offerings. It is knowing which bank wants to do business at the moment and which bank is cutting back. Which bank will give you a good deal and which bank will try and rip you off.

    Without brokers the bank offerings will be more opaque. They will take advantage of the low level of financial literacy in the community and gouge their customers. They have significant form on this and I was only able to get a reduction in my interest rate through my broker putting pressure on them as part of ongoing advice that Hayne seems to think does not exist because he has been lied to by CBA.

    In my experience lawyers are good at the law but not much good at everything else. Hayne has no commercial understanding and we should not have the structure of the financial services industry determined by lawyers.

  15. Robert Goodwin February 7, 2019 at 2:00 PM #

    Life is more complicated than ever. Look up any insurance product (Life,Home and Contents, Motor Vehicle, Medical the list goes on an on. Then you have utilities,plus phone contracts,broadband. Fortunately there is a plethora of information online (including government websites ) available to do research. If I go and get my wills done I pay a fee to the solicitor.l might not see that solicitor again for years.Same with any professional. User pays. As Marcus Padley said recently “…educate yourself.” Payment paid by the applicant up front removes conflict and means broker is working for you not the bank that pays the most. Lastly I don’t know anyone who is happy to pay the taxman anything

    • Greg February 7, 2019 at 11:54 PM #

      OK let’s treat brokers like lawyers. Payment up front at a minimum of $500 an hour. All of the brokers would double or triple their income overnight.

  16. Chris February 7, 2019 at 1:19 PM #

    Payment of commissions by a financial institution to a broker is a major conflict of interest.
    Many brokers do not provide follow up reviews but are just happy to collect the trail
    It seems brokers comments are more concerned about their loss of income and try and justify it by saying the client won’t pay.
    If a client has the value of the service clearly articulated, they will pay
    Sorry, but commissions promote the wrong behaviour

    • AJ February 7, 2019 at 3:24 PM #

      Chris, you’re very wrong here (and I am not a mortgage broker). Commissions aren’t a conflict of interest, given they’re capped and almost all lenders pay the same rate. But anyway…
      Noel is a little off on this one. The trail fee was never intended to be a payment for ongoing services but that is what it has become for most brokers.
      The way trail commission came about was a very different reason. Brokers used to be paid between 1.2% and 1.5% years ago. To incentivize brokers to maintain clients relationship with existing lender and disincentivize them to refinance someone to a new loan prematurely – upfront was reduced and trail commission was introduced..it was actually optional for the broker to receive a bigger upfront with no trail or choose a lower upfront and a trail.
      As for your statement “If a client has the value of the service clearly articulated, they will pay” – this can be proven time and time again already to be categorically incorrect. General population is neither that smart or financially responsible

  17. Nathan February 7, 2019 at 1:17 PM #

    I am a mortgage broker and financial planner. A few notes:

    +if a client settles on a loan, and refinances within 2 years, most if not all commission is clawed back = no income for the work.
    +Trail is “deferred” commission. In good faith I use this to support my clients. Banks implemented trail so they could defer the costs of upfront commission
    +I assure everyone that credit policies are very COMPLEX and not tick and flick. This means getting a loan or not if you use a broker.
    +Don’t be under any illusion that the big banks (and CBA in particular) wont benefit directly from these changes.

  18. Tony February 7, 2019 at 12:35 PM #

    I think these responses are a little dramatic. The search engines will replace brokers, who are little more than ticket punchers.

    Mortgages are quite simple to understand, compared to investment products or superannuation, for example. Rates are known in advance and terms are little different between providers.

    They are not the first, and won’t be the last, intermediated industry to become redundant in the internet age.

    • Kerri Buurman February 7, 2019 at 1:50 PM #

      You clearly have no idea. No home loan is tick and flick. With all the compliance and questions around responsible lending, exit strategies for applicants over age 50 and any complex self employed applications take several hours of meetings and structuring to submit for a successful outcome. I have been a banker first and then a broker for a total of 22yrs. The only people who can apply for a home loan with ease online are people who earn high PAYG incomes, have a high deposit and a very strong overall financial position under the age of 45yrs of age. This is a very small percentage of people.

      • Tony February 7, 2019 at 7:02 PM #

        I beg to differ. I am over 60 with a relatively low income and recently obtained a mortgage with little difficulty. I believe the broking industry is revving up a survival PR strategy which will fail.
        “Responsible lending”, “exit strategies”, now they are very technical expressions designed to confuse an bewilder customers.
        Time to find a real job.

    • Kat February 7, 2019 at 3:33 PM #

      There is mention of the age of internet, Cannex etc but what happens when those loans are declined or are complex?? What about self-employed clients who think their gross takings will service a loan? What about shift workers who have their shift allowance income reduced to 80%, thinking 100% of that income is viable. Yes, internet loans will come about but good luck researching how they use your income…more credit files will be damaged by numerous enquiries. Should I say more to all that think the age of online applications will take over??? I can list at least 2 dozen reasons why an application could be declined because a consumer has no idea about Bank policies.

  19. Don Macca February 7, 2019 at 11:57 AM #

    I have used brokers when borrowing money (to buy a car) ,arranging insurance, etc. They are generally disliked by banks, etc. Misunderstood by the public at large.
    The trailing commission received by mortgage brokers has been labelled as being unfair. In my book trailing commissions should never extend past 3 years. The payment a mortgage broker gets comes with a proviso, it must be paid back if the loan is paid off within 3 years. In a previous post i have said “I have no doubt that brokers have been the major reason for competition in interest rates.”. Brokers generally act act in the interest of borrower sourcing the most appropriate solution. While the Royal Commission should be commended for the findings. Due to lack of time they misunderstood the benefit of brokers.

  20. Rod February 7, 2019 at 11:55 AM #

    Great article and interesting reading the comments & opinions of every one….so the RC highlighted that the banks how been deliberately stealing money and that these instances are not isolated or just a few bad eggs but an entrenched culture….and in response suggests they pass their costs onto consumers! The recommendation to charge a fee will improve the banks bottom lines and lead to less competition in the home leading market…

  21. Sally February 7, 2019 at 11:44 AM #

    This is the same sort of complexity you referred to in your column that I read in the Courier Mail of 3 Feb. It more than touched a nerve. Complexity and inertia are big issues for us all in almost everything we do. It often seems to become a situation of either done like a dinner and/or give up. Even when I google a question or issue, wading through the responses can be less than helpful and quite mind-numbing.

    In the end we still have to defend ourselves, but it is nice to know there are people out there who genuinely help, like some mortgage brokers.

  22. Andrew February 7, 2019 at 11:41 AM #

    I have been a broker for 20 years, and one of the most successful in the industry. I can tell you with 99.9% certainty that if upfront commissions are abolished and the broker is then paid a flat fee anything like $2,000 or $3,000 (which the consumer won’t be happy to pay in any case) the industry is finished. No ifs or buts. Finished. It represents a loss of revenue of 50-75% for the average broker and I’m not sure any business in any industry could survive with this cut in revenue. Of course I am concerned that I will no longer have a career and neither will 20,000 other small businesses. But that’s life I’m afraid. What is important is that a home loan industry without brokers means an end to all lenders without branch networks, an end to competition, severely restricts access to credit and will negatively affect the property market, and simply hands power back to the big banks with branch networks. The consumers are the big losers and that I’m afraid is not even worthy of a serious debate. How did an inquiry into bank misconduct suddenly become an inquiry into only mortgage broking? And if Chris Bowen and Bill Shorten can’t see this blatantly obvious situation developing, how can they be expected to manage the Australian economy? The whole situation beggars belief, and if it wasn’t so serious, for everyone, it would be funny. When you can no longer get finance, or get it at a competitive rate, don’t come whinging to me. I rest my case.

    • Dane February 7, 2019 at 6:26 PM #

      So Andrew please explain why in the Netherlands where trails were removed and the industry moved to upfront fees paid by the borrower, brokers barely lost any market share? Brokers may have been less profitable but that is a separate issue to one of competition which seems to be your main argument. If your retort is that the mortgage market in Netherlands is very different and not a fair comparison I should wish to understand why?

      • Mr Netherlands February 7, 2019 at 10:21 PM #

        In the Netherlands the broker fee is a tax deduction

      • Paul February 19, 2019 at 7:17 PM #

        You should do more research on the Netherlands. Banking Competition has greatly reduced and banks margins have increased. Banks were the winners and Consumers are worse off.

  23. Michael February 7, 2019 at 11:05 AM #

    Well said Noel. Im not broker – but was confused and shocked by this proposal. It will play to the institutions, and deliver zero benefit to consumers. I wish I knew ‘what was broken’ to understand what Hayne was trying to fix. Brokers to me provide a valuable service and a filter of the market place for clients to find the best solution, and help get it in place. Do regulators really think the market is so inefficient that mortgage brokers could consistently recommend the highest comm paying loan and that clients would still come to them when their friends have lower rate loans? The market is too competitive for that.

    I am a fin adviser, and rely on insurance brokerage as part of delivering insurance advice to young clients, and the similar dynamics apply in that space also, with recommendations they are scrapped. I have a LOT of ongoing service and advice to deliver to young clients with insurance, and know if i dont they will happily sign another adviser that will, and they certainly do not wish to pay an annual fee to receive this. Let alone claims management etc

    Would be keen to hear your thoughts on that issue

    • Christopher Sharp February 7, 2019 at 11:16 AM #

      One of the first things I learnt about the Insurance industry is that 150% of your first two years premium can go to the /adviser/broker/sales person who signed you up.

      This led to the perverse incentive for advisers to recommend that their client switch to a different insurance adviser every two years.

      I don’t know whether this has changed.

      • Michael February 10, 2019 at 7:40 AM #

        Hi Chris – they were the old ‘broken’ days – led to bad and short term behaviour. Legislation has initial Commission from 1 Jan 2020 at 60% yr 1, then 20% thereafter. (currently 70% and 20%)

        Seems from experience to be the right solution as the 60% reflects extra work upfront, but not such an incentive that it would be worthwhile moving policies (churn) around – as the advisers benefit of getting 40% (difference between 60% and 20%) doesn’t cover the work and risk involved – which thus seems to be the right balance

        I offer clients the option to pay and I reduce Commission to nil, and premium is cheaper, or to have brokerage included. 1 client has elected to pay in 10 yrs.

        Would be an interesting conversation to charge a client when the insurance wasn’t accepted by the insurer, but the ‘work’ still was done.

        And we don’t charge for claims management at the most important time – and thus fees would be needed to be charged at a time when clients are most vulnerable – food for thought! All I can say is i try both approaches on the front line yet regulators and public comment with zero experience and seem to use arguments about how other industries/professions charge as some basis towards the argument to zero comm, when they don’t even know what problem they are trying to fix. Maybe spite and jealousy? In Australia?? never!! LOL Just a guess…

  24. Dane February 7, 2019 at 11:03 AM #

    There is no denying that abolishing trails will adversely affect the profitability of brokerage businesses and potentially diminish the level of competition. But as Hayne pointed out, such arguments assume borrowers won’t see the advantage of using a broker with a transparent remuneration structure (i.e. upfront flat fee). To level the playing field, banks could also charge a similar fee. ‘If the borrower pays a transparent price for the service provided to them then the market will determine that price based on the value of the service to borrowers.” That is how healthy markets operate.

    It is implausible to say trailing commissions do not influence the broker’s recommendations about choice of lender, amount to be borrowed and the terms. The incentive for brokers to maximise loan sizes has the potential to create real risks around financial stability. Households are already significantly over-leveraged. Combine this with artificially low expense benchmarks (HEM) being used to assess borrowing capacity and the end result is budgets being stretched to breaking point, especially when rates normalise.

    The argument that brokers should be allowed to charge a trail as the potential for ‘ongoing services’ is there doesn’t really pass the pub test. It would be really interesting to see the breakdown of the % of borrowers who actually utilise these so-called services post the initial loan. It’s like advisers charging ‘fees for no services’ but claiming it’s OK as the client could ring up anytime and request those services if they wanted.

    For the vested interests that will continue to preach about ‘unintended consequences’ (as Hayne predicted) which adopted a similar approach and brokers maintained their market share.

  25. Tony Reardon February 7, 2019 at 11:02 AM #

    I don’t see anything wrong with paying trailing commissions to brokers on mortgages. It shouldn’t really be looked at as getting money for nothing because there is no further advice being supplied. Instead it should be thought of simply as a deferred commission. The lending organisation is trying to align the rewards it pays for getting the business to the income it receives over the life of the loan.
    It also discourages any practice of churning into new loans just to get commission.

  26. Christopher Sharp February 7, 2019 at 11:01 AM #

    Over the years I have read a lot of your books Noel- they are all full of good valuable advice.

    Taking your example and a small 2 person brokerage running as a limited liability company:

    Say the brokerage writes 100 loans a year, that is $240000 in one off, upfront commissions and $60000 in ongoing trail commissions for the life of the loan (say) 25-30 years.

    In 10 years time the brokerage is receiving $600000 in trail commissions annually on (say) 1000 loans.

    Imagine if the real estate industry worked like this- there would be uproar and agents would all be driving round in Lamborghini’s.

    How many loans are out there paying 0.15% trail commission and what is their principal value?

    Why should residential mortgages be seen as different from other financial assets subject to FOFA’s ban on trail commissions?

    If a financial adviser recommended a loan to purchase an asset would they receive a trail commission?

    • Steve February 11, 2019 at 1:41 PM #

      I wish I was writing 50 loans as a single operator when I was a broker. There’s several things wrong with your calculations:
      1. to be writing that many loans the broker would have staff members, maybe 2 loans processors a receptions staff member, a marketer at a minimum, they may outsource the marketer. Conservatively $260 000.00 in wages before they pay themselves, overheads, insurances, rent, leasing of equipment etc.
      2. the average life of a loan at present is 4 years not 10 years, which may or may not be refinanced by said broker.
      The average a broker earns, according to Deloitte, is approx. $86 000.00 before overheads.
      When I was a Broker I had to answer existing customers queries before I could start my day, anything from can you fix my loan, do I service for an invest property, we might be separating can one of us keep the house, all of this takes time every day. So you’re suggesting that Brokers should work for free. Do you?
      Trail was a partial of upfront commission to ensure the broker serviced the clients needs post settlement and believe me they do. Don’t kid yourself if we move to a user pays model interest rates will go up, if labor reduce or abolish negative gearing we will all suffer. The worst thing for Australia right now would be a recession, if Labor get in there will be one, just my opinion, but these comments are full of opinion. I don’t know much about financial planners but are they allowed to recommend a loan to buy anything, I would have said not. There are still commissions on insurance products as far as I am aware. Realestate agents earn anywhere from 2-4% selling a property I think their upfront way outweighs what a Broker earns, so unfair comparison.

      So are you saying that all commission is wrong/conflicted. Isn’t this the way business has operated for decades? A salesman sells a product for a business and is remunerated for it, most of the time in commission and bonuses. So is the way any business works in the world that remunerates via commission wrong?

  27. Peter Ewers February 7, 2019 at 10:53 AM #

    In all of the commentary on the impact on small mortgage brokers if the upfront commissions are moved to a borrower pays model and trailing commissions are abolished, I have not seen anything about what percentage of broker originated loans are provided by the big brokers (Aussie et al) that are either fully owned or majority owned by the major banks.

    If in fact they now dominate the market and become uneconomic, I expect the major shareholds will simply close them down.

    People will pay for a service if the benefit is there, but if securing the most basic of financial products, home loan is that complex, perhaps we have over complicated the product in the guise of competition.

  28. Ross Bell February 7, 2019 at 10:53 AM #

    What alsolute nonsense.
    Most consulting businesses ( as mortgage brokers essentially are) rely on chasing new work. Few have the luxury of an annuity form of cashflow. In the infrequent instance if further advice is required, surely an hourly charge out rate would be appropriate.

    • Phil February 7, 2019 at 11:29 AM #

      The author did come through the financial industry at a time when trailing commissions on investment products and margin loans were very much the norm, so you must accept some bias.

  29. Frank February 7, 2019 at 10:28 AM #

    I’m sure experiences are different, as in any industry with 20,000 practitioners. But one thing some mortgage brokers do which is not recognised (and why banks would prefer to have them out of the value chain) is protect the borrower from the bank itself. That is, when banks switch borrowers to more expensive options on rollover, or increase rates on variable rate mortgages.

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