Calls by consumer advocacy groups to scrap upfront and trail commissions and bring in a flat fee for brokers will lead to negative consumer outcomes, the head of a leading industry association has warned.
Dramatically changing the current commission structure would alter the dynamics of the industry and significantly reduce the amount of operators working with it, Peter White, executive director of the Finance Brokers Association of Australia (FBAA), told Australian Broker.
In a time before brokers, interest rate margins were much higher than current times, he said, with these margins dropping to a more reasonable level once brokers finally entered the market. Introducing a fee for service would reverse this trend, he added.
“If we disassemble the marketplace, the impact is that margins would go up even further with the banks. The service levels would also drop away because it was the brokers who introduced home delivered services to the home loan sector.”
Product enhancement and development would also be affected, he said, with brokers helping supply consumers with new and innovative products from branchless banks and non-bank lenders which depend on the third party channel.
“The commission model as it stands is fair across the full marketplace. The regulators aren’t suggesting drastic changes; it’s only the consumer advocacy style people who say that this should happen. Nobody else in the marketplace is saying this because it is only benefit after benefit that brokers have brought in.”
While White admitted there were a very small minority of dodgy brokers in the industry, he said that upending the commission model was not the way to sort this out.
“Every now and again you come across brokers who you know shouldn’t be in the game and you do what you can to get them out. But this is the same for any industry. If someone’s going to be a crook, they’re always going to be a crook. What you need to do is to find them, get them out, and put them behind bars.
“Even with a fee-for-service structure, they’re still going to be crooks. The issue is that if you turn around and destroy the commission structure or make huge, significant changes, you’re going to have reduced competition in the marketplace, worse service standards, higher interest rate margins, and very bad consumer outcomes.”
The commission structure is intrinsically linked to competition because at the end of the day the broker offers a service that the lender normally provides, White said.
“As far as finding a client, it saves the lender advertising dollars. When you look at the loan process, the things that a lender normally does are being done by a broker. The lender has already marginalised that cost into their branch network. It’s actually a cheaper marginalisation cost to cover a broker’s fee or to pay commission.”
The current commission structure also ensures that smaller deals are financially viable for the lenders, White said, adding that the flat fee model would mean banks lose money on these deals unless they bring interest rates up.
“The bank has to make sure they make money on those transactions. There’s an intrinsic problem of pushing up interest rates because of smaller loan sizes. And if you then suggest putting in a tiered flat fee structure, what’s the point in that? The commission structure deals with that variable anyway. On the smaller transactions, the broker gets paid less but the client gets looked after.”
White said that the FBAA has approached consumer groups like CHOICE with these issues in the past.
“Unfortunately, they’ve got a very blinkered approach to the world and don’t really want to sit down and have discussions with you. You’ve also got to be very cautious because anything you say to them can be taken in different directions.”
“I was a part of the audit committee for some research they did a couple of years ago. The data was taken from about 18 people looking for loans but they saw that as being symptomatic of a much bigger issue in the whole sector. There were some issues that came out of that which were relevant to industry but it didn’t prove it was a symptomatic, systemic, industry-wide issue.”
While consumer advocates said these results were just the tip of the iceberg, they were more likely the entire iceberg, White said.
“It’s not like there’s an issue with 10% or even 1% of the marketplace. The number of claims or issues that occur on a monthly basis are very, very small compared to the total size of the marketplace.”
