Tag: Mortgage Brokers

Liberty Financial buys National Mortgage Brokers (nMB) from Aussie Home Loans

From Australian Broker.

Leading non-major lender Liberty Financial announced today the acquisition of wholesale aggregator National Mortgage Brokers (nMB) from Aussie Home Loans, effective 2 August 2017.

“We have tremendous admiration for nMB which, under Aussie’s ownership, has grown to a team of over 400 brokers and a loan book of almost $14bn,” James Boyle, chief executive of Liberty, said.

“Liberty has successfully developed a thriving retail distribution channel, Liberty Network Services, over the past five years. The acquisition of nMB expands our distribution capabilities and creates unique growth opportunities for both organisations.

“There is a strong alignment of vision and values, with both nMB and LNS focusing on their distinctive value propositions which share a commitment to providing the highest quality of professional mortgage broker services to consumers,” Boyle said.

According to nMB managing director Gerald Foley, “nMB has constantly evolved since our inception in 2001 and I am excited about the depth of resources that Liberty can bring to our fast growing business. I look forward to continuing my leadership of nMB and I would also like to thank Aussie for its support since it acquired the business in 2012.”

Chief executive officer of Aussie, Mr James Symond, said “nMB is one of Australia’s longest established mortgage aggregators and a genuine leader in the wholesale aggregator market. While nMB has been a very positive contributor to the success of the Aussie Group, the future of Aussie’s long-term strategy is to concentrate solely on our own branded distribution footprint.

“Liberty is a long term partner of both Aussie and nMB and I am confident that it is the right business and leadership team to facilitate nMB’s next phase of growth.

“Aussie will retain its strategic partnership with nMB for many years to come and we wish them well as an important part of the very successful Liberty group,” Symond said.

Broker commissions pushing rates up: UBS

From Australian Broker.

The rising costs of broker commissions are pushing mortgage rates up by 16 basis points per year for every Australian’s mortgage, according to a top banking analyst.

Jonathan Mott from UBS said that a “blow-out” in commissions, which exceeded $2.4bn in 2015 (increasing 18% from $1.46bn in 2012), was linked to higher rates for mortgage holders across the country.

“Although commissions are deducted from NIM (not expensed) this is equivalent to 23% of the cost of running the Major Banks’ entire Personal and Consumer Banking operations,” he said in an Australian banking sector update entitled ‘Are Mortgage Brokers Overpaid?’

“Average commissions are now $4,600 per mortgage, which we believe is disproportionate for advice provided on a simple, commoditised, single product, particularly when compared to the fees charged by Financial Advisors for ‘simple’ financial advice ($200 to $700).”

The above figure for total commissions per mortgage was likely to be understated, Mott added, since it took the total commission revenue divided by the mortgages written in that year. This failed to take into account that trail commissions were earned from mortgages earned in prior years over a smaller number base, which means the average commission earned over the life of a loan is likely to be even higher.

“Although mortgage broker commissions are paid by the bank not the customer, commissions are factored into the bank’s cost of funding and have been a driving factor in mortgage repricing in recent years. At the end of the day, these costs are born by all mortgage customers.”

Mott acknowledged that many customers valued the services of a mortgage broker but questioned the trade-off between the value received versus the cost of service.

“While a mortgage is a large financial commitment, it is a simple, commoditised product. Options are relatively limited (fixed vs variable, interest only vs principal & interest, offset account) while APRA’s focus on ‘sound lending practices’ ensures there should be little difference in underwriting standards or size of loan offered across the banks.”

He said he expected the banks to negotiate “materially lower fee-for-service mortgage commissions” in the near future to comply with both the ASIC and Sedgwick reviews. He recognised that brokers would likely be unhappy with this outcome but said there was little they could do.

“If mortgage brokers refuse to deal with one or more of the banks on the basis that its commission rates are too low, this will reinforce the inherent conflict of interest highlighted by ASIC (lender choice conflict).

“Additionally, if the mortgage broking industry chooses to channel more flow away from one or more major bank, the other banks would not have capacity to absorb this flow without breaching their APRA caps (investment property loan growth must be comfortably below 10%).”

Mott also said that advice for a commoditised, single product such as a mortgage could be easily provided by robo-advice.

Flat fee model will hammer consumers: FBAA

From Australian Broker.

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.”

The Majors Are Divided On Brokers

From The Adviser.

The Sydney-based majors (CBA and Westpac) have a very different view to their Melbourne competitors (ANZ and NAB) when it comes to third-party distribution. CBA and Westpac’s move away from brokers is no secret. It’s been well documented: reported by Morningstar and called out by AFG.

There are a number of different reasons for why this is happening. For a start, both CBA and Westpac have traditionally held larger investor and interest-only books than NAB and ANZ, and larger proportions of each — brokers are a convenient lever for slowing the growth in these portfolios.

It’s more likely, however, that these banks simply aren’t as keen on brokers as ANZ and NAB. Paying for huge branch networks (a fixed cost) that are underperforming while also paying for third-party originations (a variable cost) rubs some CEOs the wrong way. Particularly as they scramble to meet ever-increasing capital requirements and — more importantly — produce profits for shareholders.

What about the customer?

In a recent interview with The Adviser, CBA chief executive Ian Narev said that while the broker network “provides a really important proposition that customers like and want” and will be a “critical part of the group strategy”, the “preference” was for customers to go through the proprietary channel.

He said: “[O]ur preference is always going to be, as you can imagine — for all sorts of reasons — to service as many of our customers through our own channels as we possibly can. That’s a strategic priority for us.”

Meanwhile, Westpac chief executive Brian Hartzer told The Adviser in May that while the bank has “no issue” with brokers, its branches are a priority: “We want to do better in our proprietary channels. We know that customers like to come directly to us online. We know that customers like visiting our branches and talking to our people.”

Compare this to ANZ’s strategy. Last year’s JP Morgan Australian Mortgage Industry report found that despite being the smallest of the four majors in the domestic mortgage market, ANZ has been successful in achieving the same dollar growth in mortgage balances since 2010.

“We believe a key driver of this result has been the success ANZ has had with the broker channel, with originations rising from ~40 per cent of flow to ~50 per cent of flow since 2010,” the report said.

Critically, JP Morgan found that ANZ has been steadily reducing its branch presence since 2011.

“ANZ is in the unique position where it has consistently grown its loan book above market for the last [few] years at the same time as it is actively reducing its branch presence and increasing its broker presence,” former JP Morgan banking analyst Scott Manning said.

“That is acting as a bit of a business case potentially for other banks to follow,” he said.

Like ANZ, NAB saw the writing on the wall and has made significant investments in the mortgage broking industry. Last year the group launched its Broking for Life campaign, along with an overhauled product suite, in an effort to take advantage of the growth in the third-party channel.

Speaking to The Adviser at the time, NAB’s Steve Kane explained why the group is banking on brokers.

“We did it on the basis that customers are going to brokers, they’re going to continue to go to brokers in ever-increasing amounts. If we don’t provide the right service and the right opportunity for those customers to deal with us through the broker, then… it’s not so much how much more we will get; it’s how much less we will get.

“It’s as much a defensive strategy as it is an acquisition strategy. It’s just the right thing to do. If we truly believe in the broker channel, and we do, then we had to show that, not just talk about it.”

Right now, there appear to be two distinct camps of major banks, separated geographically but also by their third-party strategies. One in Melbourne (ANZ and NAB) and one in Sydney (WBC and CBA). Together they hold around 85 per cent of the mortgage market. On most big issues the majors are generally in unison. On brokers they are now divided. They may even have different views about the future of broker commissions.

In an environment where big decisions are being made around broker remuneration, this is a great outcome for industry. If the big four were moving together as a unit, like they have on other matters, then things could get ugly. But they’re not.

The broking industry has effectively divided the majors — a significant development that could deliver some very positive outcomes for competition and policy setting if it continues.

Banks commit to negotiating commission changes

From Mortgage Professional Australia.

The Australian Bankers Association wants commissions to be decoupled from loan size but is prepared to negotiate with brokers to find a new model, it has announced.

In an exclusive interview with MPA, the ABA talked through its submission to the Treasury and its views on commissions, volume related bonuses, soft dollar and self-regulation. “The ABA doesn’t have any preconceived ideas about the exact figures of the new [commission] model: what we are doing is working through the combined industry forum,” an ABA spokeswoman told MPA.

The combined industry forum, which involves the ABA, MFAA, FBAA and COBA, first met in June and is scheduled to meet later this month, with the broad objective of responding to ASIC’s remuneration review. Participants hold a range of different views, with the ABA telling MPA that “we do believe that the standard commission model will need to be de-linked from loan size”

However, the ABA played down suggestions of major changes to commission: “we don’t think that the concept of upfront and trail should be abandoned: we think that the entire model needs to be considered in the light of what promotes good customer outcomes”

Under the shadow of Sedgwick

The recommendations of the Sedgwick Review look likely to determine the ABA’s stance on questions of remuneration.

The ABA says Sedgwick’s recommendations ‘intersect’ with those of ASIC: Sedgwick called for commissions to be completely decoupled from loan size by 2020, but the ABA told MPA this was a final deadline: “banks are taking immediate steps to see how they can implement the Sedgwick recommendations but are we mindful about how these can be worked through with the rest of the industry.”

Although previously criticised for taking unilateral action, the ABA stated that “in terms of activity outside the forum, the ABA’s energy is invested in pursuing the objectives of the forum and our member banks are also committed to implementing the recommendations of the [Sedgwick] Review.”

ABA supports self-regulation

The combined forum has been portrayed by MFAA CEO Mike Felton as a potential basis for industry self-regulation and the ABA hesitantly support this view.

Although the initial objective of the forum was to respond to ASIC, the ABA told MPA, its purpose did “not necessarily” end there: “depending on the Government’s response and acceptance of the solution, we would look at self-regulatory mechanisms to implement it.” In principle the ABA supports self-regulation on the basis it can drive change “more quickly, and avoid unintended outcomes for industry and consumers.”

Consumer advocates criticised self-regulation for inadequately representing consumer interests. However, the ABA told MPA this was unfair: “an immediate objective of the forum is to set up an appropriate and responsive channel to socialise our thinking with consumer groups and obtain their feedback. We’ll be acting on that quickly: it’s not in response to the submission: it was always our intention of the forum.”

Mortgage Broker Commissions In The Spotlight

Significant lobbying is now underway to influence Treasury in the final outcome of the mortgage broker commission changes, bearing in mind the recent ASIC review called out some fundamental conflicts in the current model, and highlighted that consumers do not necessarily get the best outcomes. Importantly, ASIC says the standard model of upfront and trail commissions creates conflicts of interest.

ASIC has put forward six proposals to improve consumer outcomes and competition in the home loan market:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.
The current idea appears to be to let the industry self-regulate. But that, to some appears to be a cop-out!

As we discussed in an earlier post – The Truth About Mortgage Brokers, “consumers should be using a mortgage broker with their eyes open. Ask yourself if the broker is truly working in your best interests”.

 

In a joint submission to the Treasury, consumer advocacy group CHOICE, along with the Financial Rights Legal Centre, Consumer Action Law Centre and Financial Counselling Australia, called for:

– the removal of upfront and trail commissions;
– the implementation of fixed fees (via lump sum payments or hourly rates);
– the removal of bonus commissions, bonus payments and soft dollar payments; and
– a change in law so brokers have to act in the ‘best interest’ of clients; and
– a requirement that brokers disclose ownership relationships and the lender behind any white-label loan recommended to a consumer.

CHOICE, which has strongly criticised the broker channel in the past, said it was “simply not good enough” that ASIC “has left it up to the industry to find a solution”.

The group suggested that the way mortgage brokers are currently paid “means it’s very unlikely that a customer is going to get a loan that’s best for them” and that the industry therefore needed a “major change”.

CHOICE’s head of campaigns and policy, Erin Turner said: “We’ve called for urgent action on trail commissions, monthly payments from a lender to an aggregator which is passed on to a broker over the life of a loan.

“A lender pays out an average of $750 per year for the life of a home loan through trail commissions. Trail payments are money for jam. The broker makes money for doing nothing, discouraging them from reviewing the quality of a loan long term.”

However, as reported in The Advisor, the peak broker bodies – the MFAA and FBAA have called this submission “ignorant” and “misinformed”, which perhaps is unsurprising, as these bodies are strongly aligned with the current mode of operation.  They slammed the recommendations as “detrimental” to consumer interests.

The executive director of the Finance Brokers Association of Australia (FBAA), Peter White, said the groups had “no regard for the competitive position and incredible value proposition that brokers bring to home loan borrowers”.

He went on to say it was “very concerning” when “misinformation is disseminated by those claiming to be consumer advocates, but who don’t tell the truth”.

Mr White suggested that, without the competition of brokers and non-banks, interest rates would still be around the 7.5 per cent mark (rather than 4 per cent).

He added that the suggestion of a flat fee would actually lead to a rise in interest rates.

“The average loan amount nationally is around $450,000 and the average commission is 0.60 per cent, meaning a flat fee, commercially, would be around the $2,700 mark,” he said.

“In regional markets, where loan sizes are smaller, a loan of $200,000 would (in the current structures) pay around $1,200 and not $2,700 in a flat-fee model, and lenders would never wear such a loss.”

Mr White said the groups also claim that mortgage brokers are giving advice, yet that’s not the case.

“Under the regulations that govern mortgage brokers, they give credit assistance and are doing work on behalf of the lender, which is why the lender pays them a commission and it has no bearing on the interest rate the borrower pays.

“If you don’t use a broker you go to a bank which still has the administration costs for the loan, so it’s cheaper for the bank to originate a loan through a broker than at a branch.”

He said the suggestion to abolish trail commissions is “an ignorant position to take”.

Speaking of the consumer groups in question, he said: “If they knew their subject matter, they would know that trail commission is paid to brokers to offset costs of providing ongoing customer service and to manage the borrower’s ongoing and variable lending needs as required under the national consumer credit protection regulations.

“There is absolutely no evidence to suggest trail incomes harm competition.”

Changes would ‘significantly harm the interests of consumers’

The Mortgage & Finance Association of Australia (MFAA) also released a statement, saying it was “disappointed” by the consumer groups’ submissions and comments, adding that they would “significantly harm the interests of consumers they claim to represent”.

Touching on the consumer groups’ proposals, Mike Felton, CEO of the MFAA, said: “A fee-for-service model may suit lenders, but it would drive the majority of brokers out of the industry. This removal of access to brokers for Australians would severely reduce competition in the industry, which is something we are trying to avoid for consumers.

“A single, lender-funded, fee-for-service would lead to a standardisation of all fees, which we believe ASIC itself does not support and we believe would also be considered anti-competitive by the ACCC,” Mr Felton said.

He continued: “I do not see how removing brokers from the industry, and consolidating power back in the hands of banks, serves the needs of consumers.”

Mr Felton highlighted a 2015 Ernst & Young study that found that 92 percent of consumers reported they were ‘satisfied’ or ‘very satisfied’ with their broker’s performance, and highlighted that consumers have increasingly turned to brokers to arrange their home loans – with more than 53 per cent of all mortgages written by the third-party channel.

He concluded: “This is also about access to finance for Australians. If you live in a regional or rural area, you may not have access to a bank branch – or you may have access to one bank branch. Brokers provide regional Australians the same access to finance as people who live in inner Sydney or Melbourne and it is critical that we should avoid doing anything to negatively impact that.”

Mr Felton said that the proposals also did not reflect the concerns raised by ASIC.

He commented: “ASIC understands that brokers drive competition and provide a critical service to consumers that combines choice, expertise and convenience, to help them make informed choices and get the most appropriate deal…

“When you are obtaining a mortgage, there is a lot more at stake than just the interest rate. Brokers assess the needs of their customers in detail, both now and into the future and recommend products and lenders that suit these needs.”

Both associations said that they have been actively working with ASIC, Treasury and a number of other key stakeholders on different ways to improve the commission structure to enhance consumer outcomes.

Separately, a submission from Mortgage Choice, also discussed by The Adviser, has told the Treasury that the current upfront commission structure for brokers is “sound” and should not be changed to reflect the loan-to-value ratio of mortgages.

In its submission to ASIC’s Review of Mortgage Broker Remuneration, seen by The Adviser, Mortgage Choice said it was generally “supportive” of ASIC’s review, but argued that the current, standard commission model was “sound” and some proposals may be hard to implement.

Touching on the first proposal, which focuses on “improving” the standard commission model so that brokers are not “incentivised purely on the size of the loan”, Mortgage Choice suggested that no such changes should be implemented.

Writing in the submission, company secretary David Hoskins said that Mortgage Choice believed the current model is “sound and delivers positive consumer outcomes”, adding that the upfront commission structure “appropriately compensates the broker for the time and effort required to lodge an application and take it through to approval”.

He elaborated: “The time and effort involved in this process is significant, it requires the broker to forensically assess the customer’s needs, future needs, income, asset position as well as living expenses, review the current offerings in the market and match the same with a suitable solution.

“The payment of trail commission encourages the broker to put the customer in a product that will be suitable for the consumer over the long term.”

The submission also noted ASIC’s finding that there are more interest-only loans in the broker channel, and higher LVRs and loan amounts, but emphasised that this is due to “the demographics of the customers who choose to use a broker and the more complex needs they bring to the table, as well as brokers actively looking for solutions that meet their customers long-term needs”.

“We do not believe that brokers, in general, place loans with the sole intent and purpose of receiving additional commission,” it said.

Looking at ASIC’s example of changing commissions to “reflect the LVR [loan-to-value ratio]”, Mortgage Choice said it would “not be correct” to suggest that it would be effective to change the shape or quantum of broker commissions based on LVR, interest-only or lower loan amounts.

The submissions reads: “Broker economics need to line up with lender economics and consumer outcomes. Markets already price for risk and return driving both lower LVRs and higher loan amounts through discount pricing to the end customer. Unless the regulator is intent on dictating the discounting regimes set by lenders, then the only truly effective mechanism available to the regulator is through being more prescriptive in lender underwriting policy or shaping the economics at the lender end to drive an increase in consumer pricing at the higher risk end of the market.”

When it comes to bonus commissions and bonus payments, Mortgage Choice said it did not believe that these types of payments were a “significant influencer” in terms of where a broker places a loan, and revealed that it only received such payments from two lenders.

Noting that the amount received from its bonus payments was “not significant” and is “pooled and shared with brokers based on the volume of business they write across the lender panel”, it added that it was “not opposed” to the removal of these payments in the industry as it would align it with other parts of the financial industry (bonus commissions and payments have been removed from the financial planning and life insurance sectors).

The brokerage was also supportive of the removal of soft dollar benefits that could influence broker decisions, but thought lender sponsorship and aggregator conferences and events should not be removed if they are linked to broker professional development. “These are essential to the progression and increased professionalism of brokers in our industry,” it said.

Likewise, it said that hospitality benefits “such as tickets to sporting events or concerts” should be advised to the relevant aggregators to enable appropriate monitoring.

Change lender policy and pricing

Indeed, the company position said that if ASIC wishes to change the shape and nature of mortgage lending through broking or through the lending system then there are “two significant levers that need to be used: lender credit policy and lender pricing”.

Mr Hoskins writes: “Influencing lender credit policy would ensure borrowing levels are appropriate based on servicing, LVR and repayment restructure (IO v P&I). By varying lender policy, the regulator can essentially adjust the loan portfolio characteristics…

“Brokers work with borrowers to obtain the most cost-effective lending solution. To suggest that a broker would encourage a customer to borrow more or to borrow at a higher LVR would not be an effective business outcome for a broker who would very easily lose a customer relationship if they did not find a competitively priced lending solution. Furthermore, lender pricing to consumers follows the economics of lending in that the larger the loan the larger the profit for the lender and as such, lenders typically offer larger drive discounts for larger loans. Accordingly, in certain situations, customers’ needs may be well served if they were to borrow just enough to cross the next pricing tier and then place the additional funds in an offset account.”

Mortgage Choice concluded that for commissions, the current structure is “sound”, adding that the “shape and the quantum” of initial and ongoing commission is similar to the commission structures to be adopted in the life insurance industry.

Lastly, Mortgage Choice emphasised that the remuneration review and the ASIC industry funding model review were “inextricably linked” and should be considered together if the end goal is delivering positive consumer outcomes.

It explains: “Ensuring a company has responsibility for governance and oversight is critical to providing good customer outcomes.”

The response outlines that it is “comfortable” with the idea of a new public reporting regime and requirements for more broker oversight, but warned that aggregator and lender information would need to focus on a loan, customer and broker specific level, rather than an overarching view.

S&P lauds ING broker approach

From Australian Broker.

The relationship of ING Australia (trading under ING Direct) with its brokers has positioned the bank well in the current economic environment, according to analysts from ratings agency S&P Global.

A note written by S&P analysts affirmed the current A- issuer rating given to the bank and said that the outlook on the long-term rating remains stable.

As a subsidiary of the wider ING Group, ING Direct was likely to be supported by its parent company in almost all foreseeable circumstances if required, they wrote.

Growth in ING Bank puts it on the same level as Suncorp, Bendigo and Adelaide Bank, and Bank of Queensland, the analysts added, with a cost-to-income ratio of around 38% – one of the lowest in the Australian banking sector.

The analysts also pointed to ING’s continued success in the third party channel despite some heavy competition.

“We believe the bank’s approach to third-party brokers – primarily one premised on simple and consistent product structures and ease-of-engagement – positions the bank well to maintain its momentum within this channel, even though it leaves the bank susceptible to business disruption akin to outsourcing risk.”

In the past this reliance on the third party has played to the lender’s strengths. Whether this continues in the future will depend on the degree to which borrowers want to use mortgage brokers versus approaching ING directly through its digital platforms, Michael Puli, associate director of financial institutions ratings and co-author of the note, told Australian Broker.

“Where we do see brokers as a part of ING Australia’s ability to manage at the moment is the speed of their systems, their consistency, and the ease of interaction. Also brokers have offered ING a degree of diversification across the country which is supportive of their creditworthiness.”

ING Direct has been better at leveraging the broker distribution network than some of its peers and new market players such as the mutuals despite recent regulatory changes, Puli added.

One risk to ING Direct related to the third party channel has to do with commission and broker incentives, Puli said.

“A company with a branch network has complete responsibility over their bank staff. However, ING Direct is reliant on brokers sourcing business so if there are any instances of unscrupulous brokers – and I think that there would be very few in this instance – then that may impact their business model.”

Plans to move into non-mortgage lending would also diversify ING Direct’s revenues and solidify its business profile over the next few years.

Despite these strengths however, S&P’s analysts noted that ING Direct’s long-term issuer rating would be unlikely to change in the coming two years. A downgrade would occur if the creditworthiness of ING Group deteriorated, they said, while an upgrade would occur if ING Group increased its ability to support ING Direct or if ING Direct itself grew to take up a stronger role within its parent company.

“In this case, ING Australia as a standalone institution is BBB+. However we expect its status within the wider group and the group’s financial strength which is an A to essentially mean that the group would step in to support ING Australia to a level that’s commensurate to an A-,” Puli said.

You’ve been paying for ASIC since Saturday

From Mortgage Professional Australia.

User pays model applies to 2017/18 Financial Year, meaning brokers are already accumulating costs.

Brokers are at risk of being caught out by ASIC’s user-pays model, an industry expert has warned.

ASIC’s user-pays model came into effect on Saturday 1st July and could cost businesses with credit representatives thousands of dollars in extra costs. However, Greg Ashe, director of QED compliance services, warns many business owners will be taken by surprise: “it seems so far away; I’m conscious that…as of Saturday, all of us who have credit intermediary licensee businesses with credit reps are accruing this levy.”

Although the levy will not be charged until January 2019, the costs will be substantial – Ashe estimates between $400-$1300 per rep per year plus the businesses corporate license – and credit license holders now need to think about how to pass these costs onto their reps.

With the user-pays levy ultimately determined by ASIC’s costs it is likely to increase, explains Ashe: “There’s the potential there for ASIC to staff up as much as they like because guess what? We’re paying for it now. That fee is only likely to go upwards because this is why ASIC wanted the fee in the first place: because they are so, so under-resourced.”

Other unknowns

ASIC first announced the dates for fees back in October 2016, but there remains much confusion around the levy’s specifics.

At the time ASIC noted that “the levies charged in January 2019 will be based on ASIC’s actual operating expenditure regulating each subsector in 2017–18. This ensures that each industry group is only charged for the actual costs of regulating that group.” Mortgage brokers fall into a group of around 5,800 credit licensees, which includes banks and non-bank lenders.

ASIC isn’t entirely to blame for problems in user-pay system’s implementation, Ashe believes: “they are aware that there are terrible issues and flaws, not so much in the legislation but that there are so many unknowns, but there’s nothing they can do because it is still administratively with the Treasury…they’re waiting for the information just like we are.”

What can be done?

To prepare for user-pays, law firm Dentons (previously Gadens) says ASIC recommend that “licensees should review and ‘rationalise’ their AFSL by removing any authorisations that are no longer necessary in order to minimise the amount payable.”

Another solution could be acquiring your own credit license, which Ashe’s firm QED assists brokers to do. Even Ashe however admits that “ASIC waiting times are getting so long for this so it’s not a decision to be taken lightly.” Both Ashe and Dentons estimate waiting times of three months, with minimum costs of $3500, depending on business size.

Should user-pays provide ASIC with more resources that time could reduce, noted Ashe, but told MPA that he’s “pretty sure that the legislators didn’t want there to be thousands of more licensees because of this regulation.”

Commission changes to be decided by industry, not ASIC

From Mortgage Professional Australia.

Broker remuneration will be decided by the industry rather than by regulators, the MFAA has indicated. So immediate changes are unlikely as the Treasury lets MFAA, FBAA, ABA and COBA begin self-regulation.

In an exclusive interview with MPA and Australian Broker, MFAA Mike Felton explained that; “ASIC and the Treasury have been very clear with all the meetings that we’ve had that they’ll give the industry a chance to self-regulate.”

Felton made the claim as the MFAA submitted its views on ASIC’s Review of Mortgage Broker Remuneration to the Treasury. Self-regulation will be led by the four industry associations involved in June’s industry forum: the MFAA, FBAA, Australian Bankers Association and Customer Owned Banking Association.

According to Felton, ASIC and the Treasury have not set a deadline for self-regulation: “if we continue to show progress we will be given the time to make meaningful changes to the extent it stalls then I believe a timeline will be appropriate.”

Instead, the industry will set its own timeline at a meeting in mid-July, with Felton commenting that “the next six months will be a very busy period.”

Key issues and the ‘positive-sum approach’

In its submission to Treasury, the MFAA gave an indication of the viewpoints it will carry into self-regulation.

The MFAA has warned that ASIC’s suggestion of determining commission partly by LVR was “potentially suitable but [could involve] unforeseen consequences”, particularly for first home buyers, tax-gearing investors and brokers who put extra work into high LVR loans. They have dismissed suggestions of flat fees, standardised upfront commission or that commission size could be solely determined by complexity.

With regard to volume-based incentives, the MFAA says paying VBIs to brokers should be “urgently done away with” and that campaign bonuses should be removed. The MFAA says broker clubs should remain but entry should be based on a balanced scorecard and bonuses should not include increased commission.

Overall Felton says the MFAA want to promote competition and not leave any participant in the value chain worse off, with a “positive-sum approach”.

The cost of self-regulation

MFAA members will not experience increased costs as a result of self-regulation through the combined industry forum, Felton has promised: “it’s not going to cost them a cent; we have it budgeted into our expenses and it’ll be costing them nothing.” Whilst the forum won’t cost MFAA members extra, the increased governance, monitoring and oversight that could emerge from it will have costs that need be borne by the industry as a whole, says Felton; “we will need to decide how best to do that.”

“The cost to us is significant,” added Felton, “but the time and effort have been worthwhile; that’s what associations do for their members; it’s at times like these associations step up and make sure these review processes are informed.”

As difficult as herding cats?

With self-regulation depending on four very different associations cooperating over an extended period, there is potential for things to go wrong.

The Sedgwick Review was an example of the ABA taking unanimous action without consultation and was roundly criticised upon its release. Under intense political pressure, banks could be tempted to take further unanimous action. Felton did not have a plan to deal with such a situation, but portrayed it as unlikely:“one cannot predict all eventualities; I think for the moment we have a combined industry forum, it is absolutely committed to the task and we’ll take it one step at a time.”

Ultimately commission structure is decided between a lender and aggregator and it is possible an aggregator could reject the new regulations, but according to Felton “at this stage, it is unanimous across the entire aggregation panel that everybody wants to be involved with this process of self-regulation.”

The next industry forum will take place in mid-July; MPA will be reporting on the results of that and other associations’ submissions to the Treasury.

Fresh calls to ‘outlaw’ broker commissions

From The Adviser.

Research firm Rice Warner says broker remuneration should undergo FOFA-style reforms and argued for mortgages to be reclassified as financial products in the Corporations Act.

In an article titled Governance of Mortgage Brokers, published this week, Rice Warner slammed aspects of the mortgage broking industry in light of ASIC’s remuneration review, released in March. Submissions regarding ASIC’s findings are due today.

Rice Warner believes the structure and operation of the mortgage market is very similar to that of the financial advice market prior to the introduction of the Future of Financial Advice (FOFA) reforms, and has called for similar reforms in mortgage broking.

“ASIC has made three proposals for the reform of remuneration structures including improving the commission model, and moving away from volume bonuses and soft dollar payments,” Rice Warner said.

“Unfortunately, these proposals do not contain any firm recommendations. They simply defer to the Australian Bankers’ Association review into remuneration structures currently underway. We believe that this is insufficient and that ASIC should have articulated firm principles that it expects to be implemented.

“In our view, the principles and provisions established by the Future of Financial Advice reforms in respect of remuneration, and especially conflicted remuneration, should be the benchmark upon which ASIC should be insisting.”

Rice Warner believes “outlawing commissions” should be a consideration, arguing that they “create a poor alignment of interests”. In the absence of lender commissions, the research group says brokers would be able to charge an “establishment fee”, which could be charged at the time of the transaction.

The group was also scathing in its assessment of trail commissions: “Trail commissions make no sense for consumers – imagine what consumers would think if the real estate agent selling a home received a trail commission on the transaction.”

ASIC ‘avoided a significant issue’

According to Rice Warner, ASIC’s review into mortgage broker remuneration has “avoided a significant issue” – the form and quality of advice provided to borrowers.

The group argues that mortgages are almost always associated with the acquisition of a long-term asset – either directly by purchasing a residential or business property, or indirectly by using collateral in a property to invest in other assets.

“In conjunction with their collateral asset, mortgages are equivalent to other long-term investments and require equivalent advice especially in relation to long-term risks. Mortgages are not simple consumer credit products,” the group said.

“We do not consider that brokers can act in the best interests of consumers if mortgages are assessed and advised similarly to consumer credit products with a focus on short term income and expenditure. This is particularly the case given the review’s finding that brokers and lenders did not make sufficient inquiries into consumers’ expenses.”

Further, Rice Warner says that the lack of formal ‘know your client’ obligations that properly recognise the long-term nature of mortgages “is a deficiency that should be remedied”.

“Mortgages are long-term financial commitments that impact on all other long-term financial plans and need to be recognised as such,” the group said.

“Advice regarding the type, structure and term of a mortgage needs to recognise these other long-term financial commitments and aspirations. This is especially the case where the mortgage is used to provide gearing for further investment. To do otherwise would be a failure to serve clients’ best interests.”

Rice Warner believes that consumers’ interests would be best served by reclassifying mortgages as financial products in terms of the Corporations Act.

“This would immediately and definitively address the issues related to the levels of remuneration and the conflicts of remuneration,” the company said. “It would also address the quality of advice, the qualifications of brokers, the oversight and disclosure regime, and the need to act in consumers’ best interests. It would also recognise mortgages for what they are, long-term financial instruments, and not simply consumer credit.”

The timing of Rice Warner’s attack on broker commissions is significant, given today’s deadline for submissions on ASIC’s findings.

However, the general view of the third-party channel, as well as professional services groups like Deloitte, is that ASIC’s proposals are a positive development for the mortgage broking community.

“If we look at the ASIC review, the key positive to come out of it was that there is no smoking gun in the broker industry,” Deloitte financial services partner James Hickey told The Adviser.

ASIC has suggested some tweaking to the current model, but found that there would be no systemic changes necessary to how brokers are currently paid.

Mr Hickey said these are “powerful findings” that support not only the role brokers play in the marketplace, but also the role they play in fostering competition.

“If you were an external party looking at the mortgage market in Australia, where half of loans are written by brokers, and you are trying to look at mechanisms that could dramatically change that sector, neither review has identified those or suggested that they need to change,” he said.

This week REA Group and Domain announced significant investments in the Australian mortgage broking market, further suggesting that remuneration models are likely to remain untouched.