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ASIC commends MFAA for educating Fairfax

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Julia Corderoy | 31 May 2016, 08:35 AM Agree 0
The head of the MFAA “quite rightly” highlighted the differences in commission structures between mortgage brokers and financial planners, ASIC told brokers
  • Marshall Brentnall | 31 May 2016, 09:39 AM Agree 0
    That's a fairly thin line that the head of the MFAA is walking there. Commissions are paid by lenders, however the cost of those is actually built into the cost of the loan, much like commissions in life insurance. I am not saying that such payment is bad, as long as there is complete disclosure and clients are able to make an informed choice. There will come a time when lenders should be able to offer naked pricing where brokers recommend loan and which to alter the remuneration downwards.
    • aussielongbaot | 01 Jun 2016, 07:40 PM Agree 0
      Marshall, you have a very small understanding of the industry.
  • Tony - South Coast | 31 May 2016, 10:36 AM Agree 1
    Marshall, when a broker originates a loan to a lender, the cost of that "origination" is the commission. When the branch network or an employed mobile lender originates a loan, the cost to the lender is the wages and on-costs (including a share of rent, phone, training, car, bonuses, compliance costs, etc.).

    These costs are payable whether a loan is successfully originated or not. For the client, it is channel neutral, i.e. they will pay the same price (interest rate) through either channel.

    More importantly, the additional competition created by the broker channel has pushed the "price" of home loans down, so the client is actually better off no matter which channel they use.
  • Brisbane Broker | 31 May 2016, 01:02 PM Agree 0
    At the end of the day, no matter where the loan comes from the client will pay for the services. If the lender writes the loan they need to account for wages, holiday & sick pay super etc. Paying a commission to a broker actually works out cheaper than employing someone to write the loan for them.

    The bank will then, by rights, have more margin in the loans to offer more competitive rates for their clients in the long term.

    With NCCP the way that it is, the broker needs to disclose the amount of commission earned for the deal that they write in the Credit Guide and Credit Proposal. Clients are already making the informed choices that people who are not in the industry are asking for.
    • Adam West | 08 Jun 2016, 02:10 PM Agree 0
      I don't necessarily agree that paying commission to a broker is cheaper than employing someone to write the loan. There are a number of factors that need to be considered like the banks Return on Investment, Risk Weighting of each portfolio etc. And if you ask your BDM at any bank they will always give you a different answer on which channel has a better return for the bank.

      Whilst third party distribution channels don’t carry the same traditional fixed costs that a proprietary business would in retail lease costs and the rest, they hold other costs like trail commission, aggregator sponsorship, BDM incentives etc

      At the end of the day broker commission is the price that a bank is prepared to pay for the introduction of business. Irrespective if it's more expensive, or cheaper than a proprietary written loan for said bank, this cost is not directly passed on to the consumer given they would pay the same price through either branch or broker.
    • David Ham | 16 Jun 2016, 01:41 AM Agree 0
      To Adam West, I agree that we don't know the true cost comparison of broker loans v branch loans. But I'd suggest that for all the smaller lenders it would be prohibitively expensive for them to recreate their own branch and sales networks and advertising budgets to rival the big banks - given of course branches serve other purposes aside from selling home loans. AFG's statistics showed that smaller lenders pay slightly higher commissions than the big banks, but have at least similar priced if not cheaper loans, which they have to have as they can't compete on having a well known brand name and branch support. So it seems to me that if these smaller lenders choose the broker network over building their own distribution network, we are at worst very comparable, and I think cheaper.

      An interesting statistic put out by AFG, sourced from Reserve Bank of Australia records, was that the difference between the bank's home loan rate to customers and the cash rate fell from 4% in 1994 to 1.75% as at 2010. So the banks are making 2.25% less per home loan than before broking took hold. Based on that I'd say even if a broker loan is more expensive for a bank than a branch introduced loan (and I don't think it it is), consumers are massively better off due to the competition brokers have brought to the market over the past 20 years. On a $450,000 home loan that is $10,125 annual saving - no wonder the old players are trying to discredit us!
  • Grant | 31 May 2016, 01:39 PM Agree 0
    Marshall, the value brokers bring to their clients as well as the lending institutions is different than a financial adviser situation. If lenders were to employ the roles of the business that brokers bring to them there would be substantially more 'staffing costs' which is why the lenders pay the commissions they do. There is a much greater advantage to 'outsource' this work than it would be them trying to manage having enough staff etc.

    The other key point is that most times a broker will assist the client with a better product / rate than the branch themselves would offer the client (as I see this ALL day long). So saying that there is a 'real' cost to the client is not quite correct.

    Branch Staff have revenue targets to meet and so they have a higher 'pressure' as their job is on the line if they are not meeting revenue targets / profitability for the branch. This leads to a greater likelihood of a client being put on a product that may not be the 'best' fit for them with that same lender (because there is a higher profit for the bank / branch if a client is on a more expensive product).

    Where as being a broker I get paid the same by that lender regardless if I place the client with that same bank's best / cheapest rate product or their best / most expensive rate product.

    So like any business the cost of service is always built into the price of something, however, the advantage to clients now is it isn't a cost they have to bare.

    If you take away the lender commissions the only thing that will happen will be the banks take a larger margin on the lending (like they have shown to be doing over the last few years) and the 'saving' will not be passed onto the consumer.
  • Broker | 31 May 2016, 02:11 PM Agree 0
    Very accurately explained by Tony, Brisbane Broker and Grant - I just hope that ASIC can actually grasp these basic fundamentals of the broker industry.
  • Steve McClure | 01 Jun 2016, 12:06 PM Agree 0
    It's good to know that we have two very good industry body leaders that are proactive and assertively convey facts about matters affecting our industry.

    Without strong associations, we're somewhat at the mercy of any journos or critics taking an unwarranted swipe at us. Generally the industry is more united than ever.
  • Broker | 06 Jun 2016, 10:21 AM Agree 0
    Time to educate the Melbourne Herald - Sun, the article on Saturday written by Karina Barrymore was rather ordinary to put it nicely.
  • David Ham | 16 Jun 2016, 01:20 AM Agree 0
    The clear statistics put out by AFG have been very telling. They have shown a strongly inverse relationship between commission rate and the volume of loans each lender gets.

    Ultimately there is far too much competition in the home loan industry for any broker to possibly have a successful business unless they do the best they possibly can by their clients, and that is shown in the AFG commission statistics - in my home postcode alone there are 30 MFAA members. It makes no sense when 60% of broker's clients come from referrals (compared to 19% from paid advertising) and they face 100% commission clawbacks if clients refinance to a better loan within a year or so. You'd lose far more clients and commissions through clawbacks than you could ever possibly hope to make by trying to put clients to a higher paying lender.

    On a personal note, I have worked with over a hundred brokers over the past decade and the questions always is - 'which lender has the lowest rate for this scenario?' - never once a question about 'who pays the highest commission for this type of loan'. In fact I even run a closed Facebook group for brokers to help each other and never once are commissions raised, just brokers trying to work out the best solution for the client. I'll happily give ASIC access to it and they can see for themselves that the overwhelming majority of brokers are small businesses trying their best to look after their clients so they get the repeat business from them they need to survive.

    Unfortunately our success in cutting down the profit margins and market share of the big banks has put us squarely in the firing line of their vested interests, which is shown in these uninformed newspaper articles. We can only hope that this review is legitimately about what is best for the consumer and the economy, if so we have nothing to worry about.
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