A question of competition

by Melanie Mingas24 May 2018

As ASIC backs a flat-fee payment model, brokers on the ground say fees will limit their ability to compete and drastically reduce customer satisfaction  

Broker payment models dominated headlines once again last month, with a number of big names fuelling the debate.

Almost a year to the day since the publication of the Sedgwick report – and 12 months closer to the suggested implementation of its 21 recommendations – ASIC told the royal banking commission that only a flat payment model would tackle the “unacceptable risk of poor consumer outcomes”. 

The MFAA has previous told the Productivity Commission that customer fees would be “highly inappropriate” for the broker industry; however, the latest objections have highlighted fresh concerns, specifically for future borrowers, and they cascade throughout the finance industry.

Counting in excess of 3,800 marketplace offerings, with rates varying from less than 0.5% to more than 1% for some products, John Kolenda, founder and MD of 1300HomeLoan, says fee-based payments would place undue financial burdens on households.

Kolenda, who observes that consumers’ borrowing power for buying a home has already dropped by almost 10% in 12 months, says, “Charging consumers a fee to receive the expert advice of a broker to navigate the home finance maze is only going to make the major banks more powerful, and the home loan customer will be the loser.”

Strengthening his position, he calculates that since the introduction of brokers to the mortgage space, lender margins have reduced by more than 2%, saving consumers more than $30bn a year. 

In the Netherlands, where brokers commonly charge the equivalent of $3,000-$4,800 per arrangement, domestic banks dominated the markets before the GFC hit, and commentators say the lack of customer choice and access to advice was a primary driver.

In fact, it is only because of the GFC that the country's alternative and small lenders have been able to gain a foothold in the marketplace. The credit crunch prompted a sharp decline in the majors' market reach, and by 2017 their share of new mortgages had fallen to its lowest rate ever, enhancing competition across the board. While the choice of lenders' is stronger today, it's the result of an accidental market outcome rather than a deliberate move to implove the cutstomer experience..

Market dynamics

While Australia’s major lenders retain the lion’s share of new mortgages, the emergence of small and alternative ASIClenders has provided a boost to competition dynamics.

Both have witnessed a steady increase in business, across multiple products, with much of their growth driven through broker channels. 

Confirming their popularity, the latest AFG Competition Index highlights declines in market share for CBA, from 14.99% to 13.63%, and NAB, which has seen its share of new mortgages decline from 8.57% to 7.67%. In comparison, the non-majors’ market share is now at 35.97%. 

“Increased competition delivers value to the consumer. Many of the non-major lenders on our panel do not have a branch network. Without the competitive tension mortgage brokers bring to the market, prices would inevitably rise,” says AFG general manager of sales and operations Mark Hewitt in response to the figures.

The introduction of fintech players to the lending space is accelerating the trends. From comparison tools to the likes of digital bank Xinja, they satisfy new customer demands by achieving a level of agilityh the majors cannot.

“If banks were perceived as impartial in selling their products, brokers wouldn’t be writing more than 50% of all new loans” - Bernard Desmond, mortgage and finance specialist

While some cut out the need for a broker, others simply facilitate a quicker, simpler and more convenient transaction, leaving plenty of room for brokers to facilitate – should they be able to provide that facilitation without a fee. 

“The main consideration should always be the consumer and their access to products and services from a broad range of lenders which can compete for consumer business,” says Kolenda. 

“The foundation of the broking industry is the customer comes first. Even the major banks have acknowledged that brokers are instructed by and act on behalf of the customer.”

Improving customer outcomes

Westpac chief executive Brian Hartzer also joined the debate last month, publicly suggesting brokers charge their clients directly for advice. 

Calling it “an option that could be considered”, he backed the fee-based model as a solution to the royal commission’s findings on the exploitation of remuneration loopholes. In addition to concerns on how that would influence competition between lenders, one broker says the consequences could be far more drastic, altering the entire playing field.

“If the bank’s proprietary channel does not charge a fee and the online lenders do not charge a fee, you cannot make brokers charge a fee. If anything this will be bad for consumers as banks will have the upper hand to dictate their terms,” says mortgage and finance specialist Bernard Desmond.

At a particular disadvantage would be first home buyers, he observes, who are reliant on brokers for the majority of purchases. Further, time-pressed business owners who are borrowing to keep their enterprises afloat would face added financial pressure when sourcing reliable advice, in addition to retirees in search of reverse mortgage products.

While there is little doubt fee-for-service reforms would remove the question marks around perceptions of impartiality, it is likely that introducing such a mechanism in isolation would skew overall competition across the finance industry. Reversing the outcomes witnessed in the Netherlands, there would be huge implications for alternative lenders, as well as the all-important customer outcome.

As Desmond concludes, “How can a customer be better off if you charge fees for something that is free right now? If banks were perceived as impartial in selling their products, brokers wouldn’t be writing more than 50% of all new loans.”