Ongoing investigations, reports and commissions have seen brokers come under fire over recent weeks. However, as Ray Hair, executive director of The Local Loan Company says, brokers are not the problem but the key to a solution
Mortgage brokers are feeling very aggrieved and misunderstood right now. First ASIC, then Sedgwick and now, a royal commission and the Productivity Commission (PC) are investigating our industry. In the case of the royal commission, the investigations are far broader than just third party distribution of home loans, but right now we have been the topic of discussion, innuendo and accusation. And the inevitable media spotlight, sensational headlines and commentary.
The hot topic over recent weeks has been trail commissions. Why are they paid? Do they promote or hinder competition? And, do the banks measure and monitor the outcomes they allegedly sought?
I commenced in mortgage broking in 2001, and the questions of should trail commission be paid and why is it paid have always been the subject of debate. The agreements between banks and aggregators did not address why trail commission was payable, nor did they stipulate any contractual obligations for aggregator and broker to meet. Most agreements did, however, contain some form of anti-churn clause, reflecting the economic imperative for loans to stay on a bank’s books for long enough for the bank to recoup origination costs (commission, valuation fees, legal fees, etc). And, of course, clawback provisions applied if loans were repaid or refinanced within stipulated periods (usually 12-24 months).
The problem with the above is, we as an industry did ourselves no favours. There has been a lack of open discussion and reporting that good customer service requires a broker to maintain a relationship with their clients, to review their debt and provide advice (another term we have skirted around for years) and to ensure that their debt still meets their current and future objectives.
We didn’t need NCCP and responsible lending to tell us or require such. In fact, our industry’s leading brokers (and by that I do not mean necessarily those who have settled the most) have provided exactly the levels and type of customer service I’m talking about.
It is no surprise that ASIC has asked why there is not more transparency and reporting of broker, aggregator and lender alignment and outcomes around looking after borrowers. As an industry we – lenders, aggregators, industry media and brokers – have been far too focused on the next deal and/or who settled the most. We will therefore see increased scrutiny, measurement and monitoring of consumer outcomes at the lender, aggregator and broker level. As an industry, we need to invest in measuring and reporting relevant and timely data.
“There is also no acknowledgement of the otherwise unpaid work brokers do for their clients: seeking rate reductions, fixing interest rates”
I find it interesting, if not amusing, that the royal commission might accept that a bank does not have the competitive power or will to unilaterally change its commission offering to brokers, for fear of losing market share. Surely all a bank needs to do to compensate for a potential fall in market share is lower its interest rates and stand back. It sounds to me that the fear was a loss of margin not share!
The PC’s unfortunate suggestion that perhaps trail commission should be paid to borrowers reflects a misunderstanding of the fact that borrowers get the same pricing from their bank whether introduced by a broker or not. In fact, many customers have only benefited from reduced
rates because they used a broker: apathetic and loyal customers often pay a higher price. There is also no acknowledgement of the otherwise unpaid work brokers do for their clients: seeking rate reductions, fixing interest rates, addressing issues with account set-up, repayments, etc.
Does the PC really suggest that broker clients should effectively get a lower interest rate (payment of trail) than non-broker introduced borrowers? And are they naive enough to believe the banks wouldn’t just absorb this into their margins over time?
If the PC’s objective is to promote competition, they need to be working to find ways to allow new players into the market and promoting the smaller lenders while protecting consumers. We have actually come a long way (no exit fees, credit reporting) and, yes, there are other improvements to be made.
Brokers have played a significant part in assisting borrowers to benefit from historically low interest rates and find solutions no longer available through the banks due to regulator intervention.
Brokers are part of the solution and we all need to have a say. There will be change, as there has been in the past. Our industry provides an important and valuable service. The Combined Industry Forum, aggregators, industry bodies and media need to continue to represent and fight for balanced outcomes, protecting consumers and promoting competition.
Mortgage and finance brokers are not the problem. However, we do need to be part of the solution.
The Local Loan Companybrokers