Fee-for-Service Model: Hurting Australian Home Owners and Helping the Big Four
By Alex Anderson - Founder and CEO of Chesswork Group
This article is in response to some of the remarks made by the Royal Commissioner and the deflections toward the broking industry made by the CBA CEO in the face of scrutiny by the commission.
Currently, consumers have access to the expertise of professional mortgage brokers without having to pay one cent at all because brokers derive their commissions from the banks.
The suggestion to alter the broker remuneration model to a fee for service structure that will have to be paid by the end consumer threatens to destroy a thriving and growing industry of approximately 16,000 brokers Australia-wide.
Switching to a fee for service model will not only decimate the broking industry, but will ultimately disadvantage consumers that will be forced to either fend for themselves in a market place where each lender has vastly different policies regarding acceptable income, age policies and servicing criteria, or pay for the advice either directly from savings or borrow the fee and add to their home loan debt to cover the cost.
Such a move would also reduce competition in the market place which ultimately is the biggest advantage for the consumers in the long and short term as only the biggest banks in Australia will be able to cover the fixed costs associated with branches as well as the hefty advertising costs. Smaller lenders that derive their business primarily via the broker channel get to save on these costs and generally offer better rates and polices to consumers.
The biggest winners will be the big four with Commonwealth in particular set to make the most gains. Being the biggest bank in Australia, it has the largest capacity to advertise and can most easily absorb the fixed costs of sustaining multiple branches across the country.
Conversely, they have been the bank to suffer the most from the broker model as brokers faced with cheaper options for their clients elsewhere are taking the consumers away from the big four especially now that most consumers are more willing to use banks that don’t have branches at all.
Having said all that, the consumers themselves have given the biggest indication that the model works and is of a benefit to the consumer by virtue of the fact that the broker model has developed from 0% percent of all loans to over 55% of the market share.
The current remuneration model works well for all parties concerned. The banks only have to pay for services rendered and even the big four have been reducing the number of branches and corresponding staff. Brokers get to provide a service to their clients without having to charge them and consumers get the benefit of having an industry professional navigate the finance world and negotiate on their behalf without adding to their costs or debt level.
Our industry is one that is heavily reliant on word of mouth referral business. Many, if not most, brokers have their entire income based solely on referrals that include friends and family. If we were representing such a reprehensible industry, this would not be the case.
In terms of a conflict of interest, I was completely in favour of abandoning bulk incentives to brokers which is bad for competition. However, all the lenders have come to a market driven virtual conformity with regards to remuneration to the point where there is no incentive to take a client to any particular lender. Any broker will tell you that their primary motivation is to position a choice of lenders based on rate and policies. Having said that, the only suggestion I would make to altering the current structure would be to standardise the percentages so as to reduce the potential conflict to zero.
When the royal commissioner asked, “If mortgage brokers are getting paid by the banks, then who are they working for?” I would like to ask, “If switching to a fee for service model will invariably decimate an entire industry and put thousands of people out of work, pass additional costs onto the consumer, reduce competition and play into the hands of the big four banks gaining a bigger market share, then who is he working for?”