UBS analysts are calling for the reining in of mortgage brokers’ commissions amid concerns that they are overpaid. But the Mortgage & Finance Association of Australia (MFAA
) disputes the report, claiming the analysts used incorrect data.
In a report published on Tuesday (17 May), analysts Jonathan Mott
and Rachel Bentvelzen
said total upfront and trail commissions paid to mortgage brokers totalled $2.4bn in 2015. In comparison, the total cost of running the four major banks' personal/consumer banking operations was $10.6bn in fiscal year 2015.
“We find it astounding that the total commissions paid to mortgage brokers was equivalent to 23% of the cost base of the entire major banks' personal/consumer divisions in 2015,” they wrote.
They described the payments as “an illustration of excesses built into the financial system following a 26 year economic boom.” According to their calculations, average commissions stood at $4,600 per mortgage.
CEO Mike Felton
said this is incorrect, as the report divided the total amount of broker commissions in 2015 (which includes upfront and trail commission) by just the number of loans written by brokers in 2015. “This has given them a commission per mortgage that is about double what it actually is in the year of acquisition," Felton said.
While the total amount of commissions to the channel has increased, Felton said independent research has shown that the average gross earning for brokers is about $142,000 per annum, before any superannuation contributions, overhead costs or staff salaries. "This includes an average of $83,000 in upfront commissions and $59,000 in trail commissions, which allow brokers to service loans over many years,” he said.
Although mortgage broker commissions are paid by the bank, not the customer, the report said commissions are factored into the bank's cost of funding, and have been a driving factor in mortgage repricing in recent years. “At the end of the day, these costs are borne by all mortgage customers," the report said. According to its estimates, mortgage broker commissions add 16bp per annum to the cost of every mortgage in Australia, irrespective of whether the mortgage was broker or proprietary originated.
The analysts said brokers’ commissions are “disproportionate for advice provided on a simple, commoditised, single product, particularly when compared to the fees charged by financial advisors for 'simple' financial advice ($200 to $700).”
But the MFAA
said that working with a customer to secure a mortgage can be “extremely complex” and “often requires months of work from a broker – not to mention many subsequent years as the broker supports the customer for the life of the loan.”
The report expects banks to negotiate materially lower fee-for-service mortgage commissions in coming months. “However over time, with open data and analytics, the value-add from mortgage brokers is likely to become marginalised, particularly as APRA
's 'sound lending practices' prevent differentiation via underwriting.”
The analysts said a review from ASIC and an independent review commissioned by the Australian Bankers’ Association (Sedgwick Review) “found a number of material conflicts of interest in the mortgage broking industry.”
Felton denied this and said the reports found “conflicts” rather than “conflicts of interests.”
“There is a massive difference between these two statements. Nor have they called for sweeping changes to remuneration. Indeed, one of ASIC's key recommendations was to leave upfront and trail commissions largely intact, but for some fine tuning," he added.
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