You may have noticed that mortgage brokers have been in the news recently. Specifically, the consumer group “CHOICE” has made a submission to the Federal Government’s review into the financial sector which attacks my industry. The submission argues that commissions to brokers should be banned.
If you’ve used my broker service, you’ll know that lenders pay me a commission when I have organised your finance approval for a loan which settles with that lender. The commission is how I make a living to keep a roof over my family’s head and food on the table.
The payment of commission is always disclosed to you, and it is the way brokers like me keep our service free to borrowers like you. Without a commission, the only way I can continue to provide the service I do and make a living is to start charging to borrowers, an additional fee.
A ban of commissions could potentially wipe out our industry, destroy competition, and cause thousands of jobs to be lost. While that is a disastrous, that’s not the worst impact. The worst impact is on the consumer (you), being forced to deal with big banks, in a less competitive environment and potentially incur more costs to obtain finance, all in less time because there would be no brokers to do this work for you at no cost to you. In essence, CHOICE seeks a result which is damaging to the very consumers CHOICE says it is looking after.
Here are five reasons why CHOICE is wrong:
- Less Brokers = Less Competition
Non-bank lenders, in particular, rely heavily on brokers as a key distribution channel because they are not as widespread as the big banks. Any move to ban commissions would weaken or reduce the broker channel which removes the ability of smaller lenders to compete with the big banks. As a result, there will be less competition and consumers may only be able to deal with the big banks.
- Less Competition = Potential higher borrowing costs
In the very early 1990’s (before the mortgage broker industry existed), banks enjoyed a ‘margin spread’ of four percentage points. This margin spread meant that the banks were selling money to consumers (as loans) at a rate which was four percentage points higher than it cost the bank to obtain the very same money. Also during this time retail mortgage rates were over 10%. If there is a weakening in the mortgage broking industry, then the removal of competition may cause a move back to those ‘dark old days’.
- Less Competition and Higher Mortgage Rates = More Big Bank profits
At this moment, the Big Banks still account for 70 to 75% of the home loan market (for example, see https://fhba.com.au/small-lenders-vs-the-big-banks/). If there is less competition from smaller lenders (point 1), then the Big Banks could charge whatever interest rate they want without the fear of losing your business to smaller lenders because those lenders cannot compete.
- Less Brokers means more time and cost demands for you
Our society has evolved so that it is now common for both parents to work full-time. People are very busy (especially if they have children). A key service that brokers provide is that we can visit you at home. If commissions are banned, then because brokers would not be around as much, consumers would need to go to the lender and spend more time at bank branches. It also will mean that you will have to compare lending options yourself rather than have this done for you by a broker at no cost to you.
- CHOICE is hopelessly conflicted
CHOICE’s idea of banning broker commissions is not pro-consumer, it appears contrary to everything CHOICE should be advocating.
In 2011, the same CHOICE which is now attacking the broking industry, promoted their own brand in order to generate their own broker commissions.
CHOICE is in effect, attempting to take advantage of the manufactured outrage which does not align with reality in the following ways:
- Since 2010 the mortgage industry has been heavily regulated by the federal regulator, the Australia Securities and Investments Commission (ASIC) under the National Consumer Credit Protection Act 2009 (Cth) which imposes a number of duties and responsibilities on the industry already;
- Consumers have already voted with their feet: over 54% of mortgages are now originated by brokers (from virtually 0% in 1992);
- Greg Medcraft, the Chairman of ASIC has already stated that brokers are a positive force when he stated that “the bottom line is that brokers deliver great consumer outcomes” (https://www.theadviser.com.au/breaking-news/35862-brokers-deliver-great-consumer-outcomes-asic-chairman); and
- Mortgage brokers enjoy a very low complaint rate. Although the broker population is more than 26,000 nationally they comprise just 6% of all matters referred to the financial services ombudsmen.
Australian society in 2017 is very different to the (pre-mortgage broker) Australia of the 1990’s. The mortgage market is more competitive, our interest rates are way lower, and we are a more tolerant, diverse people.
But if there’s one thing that hasn’t changed over the last 25 years, it is that Australians still hate hypocrisy. So, if you agree with me that the CHOICE contention to ban broker commissions is misguided, there is something you can do about it.
How to be heard?
If you’re worried how a mortgage market without brokers would hit your hip pocket, force you back into bank queues and to pay for Big Bank profits, now is the time to speak up!
If you want to be heard, take one minute to write a message saying, “Hey CHOICE, banning broker commissions is a BAD IDEA”. You can get your message out by either:
- Sending me a quick email
- Leaving a comment on our website or below
- Leaving a comment on our Facebook page
- Writing to the Finance Brokers Association of Australia (FBAA)
Thanks in advance for your support. We look forward to continuing to provide you with high quality service at no cost to you (provided CHOICE does not get its way!).
Andrew Larcombe AMFAA DipFS(FP) DipFS(F/MBM)
Morbanx Pty Ltd