Why Playing With Broker Commissions Will Crumble The Economy & Cost You More
It's round seven of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in November, and time for the CEOs of the four major banks to front the commission and get another grilling.
It kicked off with, ironically, the CBA, the lender who's conduct was the main driver to the push for the establishment of the Royal Commission. The new CBA leader Matt Comyn was asked about mortgage brokers of the back of evidence his institution submitted, specifically what the banks, like his, pay mortgage brokers.
Comyn told the commission that his institution had “backtracked” on a plan for a drastic change to broker commissions that would have seen a “flat fee” model implemented.
The council assisting the commissioner, Rowena Orr QC, was happily led up the garden path as Mr Comyn inferred this would be a beneficiary for consumers. However the bank determined that it would negatively impact CBA's share of the broker originate market and thus opted not to implement it.
He went on to confirm, his personal preferred model of mortgage broker remuneration is one where the customer pays the broker direct, with the lender paying nothing – funny that.
This is where common sense, and fact, went out the window.
Here's some of the facts that were missing in the translation of what the CBA was proposing to do:
The CBA would “save” $197 million over five years
A mortgage broker would have their commissions cut by almost 60% per loan
40% of all CBA home loans were written by brokers
So why would or could such a change as proposed, or even the one “preferred” by Mr Comyn, have a sky falling affect on the country's economy?
If for one moment you ignored the impact on the small businesses in the broker industry that would become un-economical should such a plan be implemented, housing is the foundation of our economy.
Building approvals and home loan approvals are intrinsically attached to economic growth. You can't have one without the other.
Currently in Australia, almost 6 out of every 10 loans is written by a mortgage broker. That's 60% of the industry. If you removed the ability of 60% of any consumer based industry to provide service, there are only three guaranteed outcomes:
Consumer choice drastically decreases
The industry consolidates with the main and largest players increasing their share
Prices go up, as competition is the single biggest impact to lowering consumer prices
The mortgage broker industry has single handily saved Australian consumers hundreds of millions in interest costs over the last few decades. Gone are the days of lenders, the major banks, applying a 100% margins to interest rates on money they borrowed to lend to you. Because of this competition.
More importantly, it has seen an explosion in consumer options.
A great example is Macquarie Bank, founded less than 50 years ago, it has grown to become Australia's fifth biggest lender, completely off the back of mortgage brokers who generate 95% of their home loans.
Or there's the local BankWest, ironically part of the CBA group, who's 80% of loans come from mortgage brokers.
These lenders, along with a very long list of others, will disappear.
Tens of thousands if not hundreds of thousands will find themselves out of a job.
And we haven't even got to the biggest elephant of them all.
If 6 of 10 loans is written by brokers in Australia, and you kill off that industry or cut their income, where on earth does that money go?
It stays with the lenders – the people and institutions that created the very Royal Commission they are fronting by lying, cheating and in many cases, stealing money from their consumers.
And we would want to give them more business and more money?
The home loan market would collapse, with a raft of lenders going by the wayside, with the big four growing even bigger.
And access to credit and lending would grind to a snails pace.
Case in point, the major banks’ market share rose from 78.8% in July 2007 to 92.4% in March 2012 when the GFC hit and smaller lenders collapsed.
Ask any economist what happens when access to credit dries up, their answer is usually pretty simple – at best, recession, at worst….
So simply, why would we need to negatively impact the one part of an industry that has provided consumers with choice and saved them hundreds of millions, only to allow these major banks to earn more profit, and get more business.
Something to note:
The Financial Ombudsman Service (FOS) Annual Review 2017-18 reported that it accepted:
• 10,021 consumer credit disputes in 2017-18.10 Of these, 71% involved banks while 1%
involved finance brokers and an additional 2% involved a broad “other” category which
included mortgage brokers and aggregators.
• 1,016 business finance disputes in 2017-18. Of these 70% involved banks while 1%
involved finance brokers.12
• Financial difficulty disputes in 2017-18. Of these 72% involved banks while 2% involved a
broad other category which include finance brokers.
So playing with broker commissions seems like a solution without a problem, or more accurately, a solution to another problem… the bank's profit margins maybe?