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The recent Royal Commission into Banking was an overdue exercise in cleaning up instances of bad practice, theft, and unethical behavior taking place within the banking and finance sector. However, the recommendation to undermine the Mortgage Broking Industry has potentially serious ramifications for all Australian borrowers. How the banks have managed to influence the inquiry to this extent is bewildering to some, but business as usual to others.
The commission was designed to stamp out corruption, not to erode competition and ultimately cost consumers more by restricting choice.
The carefully crafted words of the head of the Commonwealth Bank, Matt Comyn, on Monday, 19 November, at the royal commission hearing were an opportunistic attempt to reduce competition in the Australian mortgage market.
His goal, I feel, is simple: to reduce acquisition costs (broker commission) and wipe out competition from smaller lenders.
Fifty-nine per cent of Australians now choose to access lenders and their products via mortgage brokers.
The big four banks are under threat from a growing number of smaller and mid-tier banks, non-banks and innovative new challenger lenders that are breathing new life into the mortgage market.
This is good for borrowers and good for Australia… but obviously not so good for the larger lenders.
There is no coincidence that historically low mortgage rates correlate with a more competitive and open market — and a robust mortgage broking industry will ensure that this continues. The welfare of Australians through reasonably priced financial products and the growth of the Commonwealth Bank in particular are unfortunately in stark conflict.
It is a fact that commissions paid to brokers have a negligible impact on the outcome for the borrower.
Before considering the Commonwealth Bank’s true motives with the call to replace commissions with a ‘fee for service’, let’s clarify exactly why commissions have no detrimental outcome for the borrower.
Firstly, commissions today are so similar between lenders that there is very little financial incentive to influence a broker. It is getting progressively more difficult for borrowers to secure finance, and on that basis a broker will place a borrower with the institution that is suited to the borrower’s needs and is most likely to approve the loan.
The reason is very simple. A broker only receives a commission when a loan settles, so it makes sense to connect the borrower with the lender that’s most likely to approve the loan, not the one that pays the highest commission. Our business depends on growing long-term relationships, not on ad-hoc transactions.
Secondly, variable interest rates change without warning — up and down depending on market conditions. To ensure that borrowers are able to move smoothly between products without penalty should their rate become out of step, there are no barriers to the borrower to switch lender. They can go back to their broker or walk into a retail bank branch; it is easy and quick.
Lastly, broker commissions are a cost-effective way to stimulate competition for the lenders that don’t have the capacity to build a vast retail network like he Commonwealth Bank. This is a critical point. Changing to an up-front fee payed by the client, removes the option to switch lenders, if necessary, for a better rate.
Mr Comyn has sought to influence the regulator by highlighting what he describes as the best remuneration structure: a fee paid by the borrower, which he told the counsel assisting the royal commission, Rowena Orr, “... that is, in my view, the most attractive model”.
It is clear why, in his view, this is most attractive model.
With the most powerful retail reach and an insatiable appetite to dominate the mortgage market, it is easy to see why the Commonwealth Bank is pushing to dismantle the competitive edge that brokers deliver to the broader mortgage market — and, most importantly, the positive impact brokers have for Australian borrowers, home owners and investors.
I’ve paraphrased sections of Alex Whitlock’s ‘Open letter to Mr Comyn’ (The Advisor 21-11-18), for this article. I’d welcome your feedback, thoughts. firstname.lastname@example.org
If you feel strongly about this situation please contact your local Federal MP and visit: www.brokerbehindyou.com.au/support-your-broker/ to sign the petition.