Tag: Mortgage Brokers

Major banks to change broker commissions

From The Adviser.

Australia’s big four banks will make significant changes to the way mortgage brokers are remunerated after they agreed to implement all recommendations of the Sedgwick review.

The final report of the Retail Banking Remuneration Review conducted by Stephen Sedgwick AO, released yesterday, made a number of recommendations relating to mortgage broker remuneration. These will see volume based incentives and ‘soft dollar’ payments scrapped, and for banks to cease the practice of increasing the incentives payable to brokers when engaging in sales campaigns.

The review also recommended that banks adopt, through negotiation with their commercial partners, an ‘end to end’ approach to the governance of mortgage brokers that approximates as closely as possible a holistic approach broadly equivalent to that proposed for the performance management of equivalent retail bank staff.

In effect, broker commissions would be governed by similar principles that banks would apply in assessing performance against a scorecard for their staff.

“Some commentary has questioned the role of ABA or the banks in this matter,” Mr Sedgwick noted.

“However, banks have a legitimate interest, especially because they both provide the funds that support the operations of mortgage brokers and bear the risks (financial and potentially reputational) if a loan is inappropriately large or inappropriately structured,” he said.

“Ultimately, a commercial negotiation would be required to establish such arrangements and preserve the financial viability of the mortgage broking industry.

“In broad terms, average remuneration per brokered mortgage may not be dramatically different to the current remuneration, but the risks (perceived and actual) of poor customer outcomes would be reduced. I would envisage that some form of trail payments would continue, with trails under existing arrangements ‘grandfathered’.

“To be clear, it is a fundamental principle of this recommendation that, in any new arrangements, competition should be preserved and the viability of the mortgage broking industry maintained. It is for this reason that client funded fee arrangements are not supported by the Review.”

Mr Sedgwick strongly encouraged ASIC to participate in the transition, particularly in light of potential issues with banks adopting the recommendation.

“I therefore propose that the banks with a significant recourse to the mortgage broker channel move to investigate and, as soon as possible, adopt an alternative payment system with strong oversight by ASIC,” he said.

CBA looks set to move quickly on the recommendations, with chief executive Ian Narev confirming that the bank will implement many of the recommendations by 1 July and will have “all changes in place” by the following financial year.

CBA group executive retail banking services Matt Comyn said the changes will involve significant reform.

“The recommendations affect all of our customer-facing teams, including branch, call centres, and mortgage brokers. Implementing them will require extensive consultation across a range of stakeholders, which we will commence immediately,” Mr Comyn said.

ANZ also confirmed that it will implement the recommendations.

“ANZ will work with both the broker industry and relevant regulators to implement the recommendations,” the bank said.

Meanwhile, NAB chief customer officer, consumer banking and wealth, Andrew Hagger, said the group is strongly committed to improving customer outcomes and building trust in the banking industry.

“These recommendations are a significant step for the industry and will require focus, discipline and strong leadership to implement them,” he said.

“In October last year, NAB committed to the Sedgwick reforms and now that we have the final recommendations our focus is to implement them well ahead of the 2020 deadline.”

In relation to the recommendations that impact third parties including mortgage brokers and aggregators, NAB agrees with Mr Sedgwick that any changes to their remuneration structure should be “viable” and “competitive”.

“We see mortgage brokers and other third parties as an important part of the future of our business. We will be working closely with the industry, Treasury and with the regulators, ASIC and the ACCC, to make sure we get the right result for our customers and the industry,” Mr Hagger said.

NAB does not pay volume-based incentives on residential mortgages to mortgage brokers

Broker numbers growing 6 times faster than lending

From Mortgage Professional Australia.

Risk of saturation in NSW and Victoria as broker numbers surge ahead of lending growth, new MFAA report reveals

Broker numbers grew by 6.4% in the six months to September 2016, whilst the value of new loans grew by just 1.1%, according to the MFAA’s latest Industry Intelligence Service Report.

The IIS found that in New South Wales the market actually contracted, by 4%, whilst broker numbers grew by 5.5%. In Victoria lending grew by 1.7% but the number of brokers increased by 7.5%. Growth in lending was concentrated on Tasmania (17.9%), South Australia (9.8%) and Queensland (8.3%), in the latter two cases outpacing the growth in brokers.

Over the period of study, from April to September, the share of loans written by brokers actually fell from 53.7% to 53.6%

The MFAA’s findings suggest broker-broker competition in NSW and Victoria is set to increase. Over the period of study, from April to September, the share of loans written by brokers actually fell from 53.7% to 53.6%, indicating new brokers entering the market may not be able to simply take market share from banks. Overall Australia now has almost 16,000 brokers.

Brokers are already being hit by such competition, the IIS data suggests, as 18% of brokers failed to settle a single loan in the six-month period, up 2% on the preceding six months. Presenting the results to brokers, MFAA head of marketing & communications Stephen Hale commented that: “I must admit that is something that certainly would be concerning. When you’re heading towards one in five not settling a loan, we’d have to ask ‘Why is that happening?’”

Hale suggested the result could be due to new-to-industry brokers who were yet to perform as well as experienced living off trail commission. In a separate finding, the MFAA reported that conversion rate for new loans had fallen by 7% and was now on average 73%, driven by conservative lending policies and more inexperienced brokers entering the market. Furthermore, the rate of broker turnover now stands at 8.6%.

More encouragingly, the number of female brokers is growing faster than that of male brokers, at 8.7%, suggesting broking is moving towards a more even gender balance. At present women make up 28% of the industry.

‘Tweaks’ to broker commissions not going far enough, says CHOICE

From Mortgage Professional Australia.

Consumer group sets out views on remuneration, soft dollar benefits and ‘not unsuitable’ obligations in exclusive interview with MPA

Brokers remuneration is “adding fuel to the fire” of Australia’s overheated housing markets and “needs to change”, according to consumer advocacy group CHOICE.

In a frank interview with MPA, head of campaigns and policy Erin Turner said that ASIC’s Review into mortgage broker remuneration showed how percentage based commissions encouraged consumers to take out bigger loans, putting them at risk: “we’re definitely taking a position that the current structure is unsuitable and it needs to change.”

Turner praised reforms in the financial advice sector, where commissions have been banned, whilst noting that may not be the solution for broking. However commission is just one of several issues exposed by ASIC’s review, according to Turner: “I know there are some parties that are saying the sector only needs tweaks. I worry about that spin: I think the message brokers need to hear is this report is significant, this report has many major findings that the outcome this sector is delivering to consumers isn’t ok…we’re not talking about a tweak: we’re talking about reform”.

Soft dollar and volume-based incentives have come under fire from many, although CHOICE is not entirely opposed: “obviously there are some things that are perfectly balanced: education – and we’re not talking about an education cruise in the Caribbean for high-performing brokers – but genuine education programs.”

ASIC’s review also found instances of broking franchises sending disproportionately high numbers of loans to the lenders that owned those franchises, naming CBA-owned Aussie Home Loans and NAB’s aggregators. Turner suggested that, rather than through increased disclosure, such problems of vertical integration could be tackled by raising the obligations upon brokers.

“We have to lift the obligation on brokers and I’ve been surprised how open some consumers are to discussing this. A ‘not unsuitable’ loan isn’t what consumers expect they’re getting and I don’t think what a lot of brokers think they’re giving either”

CHOICE also called for more transparency of referral networks and broker cross-selling, possibly through ASIC’s separate shadow-shop of mortgage brokers later this year. CHOICE will be setting out their views and potential solutions in a submission to the Treasury by the end of June, after which the government will determine which suggestions become law.

Major bank reveals lack of ‘clarity’ around aggregator oversight

From The Adviser.

A big four bank has acknowledged that data quality and public reporting could be further improved in the mortgage industry, revealing it ‘does not have clarity’ around some aggregator data.

Speaking last week at the final leg of the second series of the Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — NAB general manager for broker distribution Steve Kane touched on Finding 13 of the report, which notes that the regulator encountered “significant issues with the availability and quality of key data” from some participants.

According to the remuneration report, the lack of some data requested “affected [ASIC’s] ability to analyse the data for some of [its] core review objectives [and] raises concerns with the participants’ ability to monitor consumer outcomes in relation to their businesses”.

Some of the examples of the lack of data included an inability by a lender to “automatically track whether a particular loan was arranged by a particular individual broker or broker business”, which “increases the risk that lenders may be dealing with unlicensed persons” and “means that lenders have little visibility of patterns of poor loan performance connected to these individuals or businesses”.

At the NAB event, Mr Kane acknowledged that there was further work to be done in this area.

He said: “This is an interesting one. As a lender, we have lots of information on individual brokers and the loans they submit and we have lot of information about aggregators and their total portfolio… but we don’t have, for example, lots of information about any individual firms that operate (with many brokers under them) under that particular aggregator. That is just one example. So, we don’t have clarity around that.”

Mr Kane added that it is therefore “fair to say that the aggregators will be working much more closely with lenders around data” in the future.

The general manager for broker distribution went on to say that, through Proposal 6*, it was “clear that ASIC expected brokers to obviously adhere to NCCP, responsible lending and compliance issues around maintaining a licence, having your own ACL or being accredited under someone else’s’ ACL… [and that] the aggregators need to understand that brokers are actually compliant with all of those things… [and] actually be able to provide evidence of that and good consumer outcomes too”.

He added: “And they’re saying that the lenders need to do that as well…[they] need to ensure the aggregators have the proper information, proper record keeping, and proper understanding of the roles and responsibilities in relation to the legislation and good consumer outcomes.”

Public reporting regime

As well as improving oversight of brokers and broker businesses, ASIC has also proposed to Treasury that there be a new public reporting regime to “improve transparency in the mortgage broking market” (Proposal 5).

Specifically, this proposes that there be public reporting on:

(a) the actual value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied;

(b) the average pricing of home loans that brokers obtain on behalf of consumers;

(c) the average pricing of home loans provided by lenders according to each distribution channel; and

(d) the distribution of loans by brokers between lenders to give consumers a better indication of the range of loans that brokers within the network offer.

Touching on this proposal, Mr Kane said that one such solution could be that brokers give their customers “information that says ‘I’ve settled 50 deals this year, I’ve used this number of banks, I’ve obtained this amount of finance and this has been the price on average I’ve achieved for the customer’. It could get down to this level, which is very important in terms of disclosure to the customers,” he said.

“This all goes to the governance of oversight perspective, which is really now starting to say: ‘Do we, as an industry, have a clear understanding of all of the consumer outcomes that brokers are providing to their customer? Do we have proper understanding of whether NCCP responsible lending is met at every instance for the customer? Do we have a robust process to identify when a broker has done wrong thing and therefore the accreditation has been removed from lenders and aggregators? Do we have a clear line of sight and understand what the process is for those people? Do we have a much stronger regime in relation to a register of all of these ‘bad apples’ and how do we go about doing that? How do we go about ensuring that the end consumers know that they are not to be dealing with those people?’”

Mr Kane concluded: “When it comes to governance and oversight, it really is about accountabilities and responsibilities and understanding that disclosure to the customer about all the facilities that are available to them.

“So,” he said, “you can see that there is going to be far more reporting available to the public around these things.”

“Governance and oversight will play a much bigger role and therefore there will be much more work an information sharing and much more collation of performance and outcomes for consumers.”

The Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — also revealed that the big four bank believes that Australian brokers could achieve up to 73 per cent market share if reaction to the ASIC remuneration review is “right”.

NAB’s executive general manager for broker partnerships, Anthony Waldron, told brokers that the industry reaction to the current consultation on the ASIC report could further boost the third-party share of the market by improving trust.

Mr Waldron said that there is an “opportunity” if “industry can react and get this right”.

He explained: “It’s the opportunity for more people to understand what brokers do, it’s the opportunity to build trust even further in what you do. And if we can do that then we won’t be talking about 53 or 54 per cent of mortgages going through the broker community, we will be talking about more like the numbers in the UK where it is already in the 72 or 73 per cent.”

*Proposal 6 of ASIC’s Review of broker remuneration states that the regulator expects lenders and aggregators to improve their oversight of brokers and broker businesses, for example by using a consistent process to identify each broker and broker business (such as the use of the Australian credit licensee or credit representative number where relevant, or a unique number provided by the aggregator).

Majority of brokers expect more out-of-cycle rate hikes

From The Advisor.

A recent survey has revealed that 85 per cent of brokers believe there are more out-of-cycle rate hikes in the pipeline, which will create challenges for existing mortgage holders.Online mortgage marketplace HashChing undertook a survey recently, which found that the majority of brokers see further out-of-cycle rate increases on the horizon.

The survey’s results come after a series of lenders have lifted their home loan rates over the past couple of weeks.

The big four moved first, with Commonwealth Bank the last of the majors to announce changes when it revealed on Friday (24 March) that it would be increasing interest-only investment home loans by 26 basis points.

Other lenders have since followed suit, with a range of non-bank lenders and specialist lenders alike moving to increase rates, particularly for investment lending.

Commenting on the findings of the survey, former CEO of the MFAA and current chief operating officer of HashChing Siobhan Hayden emphasised that brokers believe these rate increases are likely to continue.

She highlighted that for consumers, the impact of this trend continuing is that they will potentially be paying more than they need to.

As these challenges arise for existing mortgage holders, brokers are uniquely positioned to help their clients, Ms Hayden told The Adviser.

“Rather than have customers set and forget their loan, they can engage with brokers to understand their current position, and whether there are better offerings for them in the market,” she explained.

She highlighted the value that brokers can bring to consumers, particularly in such an environment, “Consumers that don’t understand our sector may look at their first priority as being the interest rate. [For example,] when a customer starts talking to a broker on a Tuesday of the week but wants to go to auction on a Saturday, suddenly the turnaround time for pre-approval is far more important than whether you get a 3.7 or 3.8 per cent interest rate.

“There are so many more variables that come into play, and that’s that value that brokers provide.”

Rate hikes will drive borrowers to smaller lenders, brokers say

Of the brokers surveyed by HashChing, 97 per cent believe that the out-of-cycle rate increases will drive borrowers to smaller lenders and non-bank lenders.

“I think there’s a couple of reasons for this,” Ms Hayden said. “In the retail space, consumers will obviously work with lenders that have a bricks and mortar location, which tends to be your majors. So, someone like Suncorp out of Queensland doesn’t have a strong footprint in all the other states, but the brokers provide that distribution for them, same with ING, and the Bank of Melbourne outside of Melbourne, etc.

“So, all the second-tier lenders, all the non-majors are ones where brokers provide a significant benefit in relation to distribution. So, when it comes to brokers assisting their customers, it’s a really good time to understand whether they’re an owner-occupier or investment customer, and then looking at what the current rates are available, and from our survey, brokers are interpreting that the second-tier lenders may be a stronger fit for customers at this current point.”

Further, the survey found that 77 per cent of brokers believe that smaller lenders will continue to offer rates below 4 per cent for owner-occupiers, but almost 93 per cent don’t believe smaller lenders will do the same for investors.

In light of this, Ms Hayden told The Adviser that brokers should be supporting their investor clients by looking at the full market available.

“[They can] better communicate to customers the current cap on investment lending, which is being applied through APRA. It’s a current market condition which is pushing interest rates up in that space, so it’s about engaging customers on that matter,” she elaborated.

Ms Hayden added that the current interest rate environment, along with tighter lending standards from APRA and ASIC, presents an important time for brokers to look at providing their existing customers with detailed communication about current market changes and re-engage with them.

“[Brokers] have a CRM and a full database of customers that they’ve worked with. They often do post-settlement engagement, including newsletters and RBA alerts, interpreting information of the current loans that they have with customers.

“Brokers should target communication to those customers that may be investor or owner occupied, particularly if the rate that they’re currently on are high, and look at what they’re currently doing and how they can better assist them,” she concluded.

Mortgage fraud increasing year on year

From Australian Broker.

The number of cases of mortgage fraud has been on the rise, with brokers warned to look out for falsified documents supplied by clients seeking unsuitable loans.

 

“Unfortunately, fraud continues to increase year on year,” said Paul Palmer, Connective’s compliance support manager, at the aggregator’s professional development day in Sydney on Thursday (23 March).

“The technological advancements of digital applications enable people to create documents or change existing documents to be more and more authentic looking.”

The aggregator has seen statements that lenders could only identify as fraudulent because they had no record of issuing them, Palmer said.

“Obviously, you can’t expect brokers to pick that up. Fortunately for us, most people trying to commit fraud aren’t that good. They always make spelling mistakes, a typo, or they get their mathematics wrong.”

As fraud investigations are inherently unpleasant for both broker and aggregator, Palmer urged a proactive rather than reactive approach.

To do this, he suggested brokers undertake all due diligence, meet required responsible lending obligations, cross check & verify all documents provided by the customer, and look for inconsistencies.

“We see a lot of differences in fonts, in key financial data, and also, as I said, a lot of mathematical areas. Run their payslips through the pay calculator and you’ll be amazed at how often that finds something.

“One of the biggest ones I found over the past 12 months is where there were two payslips and they forgot to change the accrued annual leave entitled from payslip to payslip; which we would expect to change. It’s a very common mistake.”

If it is impossible to meet the customer face-to-face, Palmer encouraged brokers to mitigate any risks by becoming familiar with conditions that lenders set up to accept remote broker-client meetups.

“From our perspective, a good thing is to get certified ID. Through Skype or Facetime conversations, get a snapshot of their ID. It fulfils an obligation to show you actually know who you’re dealing with.”

Finally, Palmer warned brokers to put themselves in the right mindset when it comes to fraud.

“Don’t think that you can’t get caught,” he said. “Unfortunately, there’s been a significant increase in the amount of referrals looking to give loans to mortgage brokers. In particular new-to-industry brokers have been targeted by people who have clients that can only service or get a loan through submitting fraudulent documentation.”

He urged brokers to do due diligence on their referrers as well.

“Make sure you’re comfortable with them as people, make sure they’re people you do your own business with yourself, and don’t trust anything they give you more than anything provided by your clients. In some ways, you need to be more skeptical.”

Consumer advocates call for further ASIC reviews into brokers

From Mortgage Professional Australia.

ASIC’s Review into mortgage broker remuneration does not go far enough, according to consumer advocacy group CHOICE. In a panel hosted by ASIC at their 2017 Annual Forum, CHOICE’s head of campaigns and policy Erin Turner argued, “we can’ just settle for tweaks to the system…I hope this is the first report of many”.

Turner highlighted three issues in mortgage broking: a gap between consumer expectations and reality; conflicts of interest; and the need for system wide reforms beyond commission. In particular she criticised the current regulation for its stipulation on providing ‘not unsuitable’ advice. Mortgage brokers who provide advice on investments, tax and SMSFs should be ASIC’s next target, Turner said.

Turner’s comments did not go unopposed on the panel. Sitting with her was the MFAA‘s Cynthia Grisbrook, NAB’s Anthony Waldron and AFG‘s Brett McKeon. One awkward encounter saw Turner use an extravagant broker conference on a cruise ship as an example of banks’ soft dollar benefits, only for McKeon to explain that in fact it was AFG who ran the cruise.

One point that most parties did agree on (NAB excepted) is that the ongoing Sedgwick Review by the Australian Bankers Association should not be allowed to determine changes to commission. This was despite ASIC’s report referring to the Sedgwick Review at several points, and Stephen Sedgwick himself moderating the panel.

Mortgage Brokers Are Essential To The Home Loan Industry

It has been interesting reading the media coverage of the recently released ASIC report. Some suggest brokers have been “slammed”, others suggest its  more a touch on the tiller in terms of commission models. Having read the ASIC report in full – more than 240 pages, I think there are three points worth making.

First, around half of mortgages are originated via the broker channel, it varies by lender of course, but consumers get more responsive assistance and access to industry knowledge via a broker, and our surveys indicate much higher satisfaction ratings than those going direct to a bank. Because brokers look across lenders, they should have access to a wider range of options, and (perhaps) better pricing. Different types of customers use brokers differently.  But there is a valid and important role for brokers.

Broker originated loans may be more “risky” but this is more to do with the types of consumers who choose to use them.

Second, the current commission models are complex and not transparent, especially as it relates to soft commissions, incentives and other elements. In addition, the ownership of brokers is unclear. As a result consumers cannot be sure they are getting unbiased advice, and it may be the ownership structures and commissions get in the way.  As ASIC says:

Remuneration and ownership structures can, however, inhibit the consumer and competition benefits that can be achieved by brokers.

ASIC also says:

Brokers almost universally receive commissions paid by the ‘supply side’ of the market (i.e. the lender or aggregator), rather than by the consumer. Our review identified significant variability and complexity in remuneration structures between industry participants. The common element across all remuneration structures for brokers, however, was a standard commission model made up of an upfront and a trail commission.

ASIC are not suggesting the removal of the commission model, but they are suggesting significant changes to it. There will be ongoing consultation on the nature of those changes. But I think the enhanced requirements for disclosure of ownership structures is as important. Transparency is good. Better transparency is better.

We did a piece on brokers on our video blog (in 2016) – in the Truth About Mortgage Brokers.

But third, there is something which continues to bug me. Financial Advisors have a requirement to provide “best interest” advice (see ASIC’s report today), whereas Brokers and Lenders dealing with often the largest transaction a household will undertake have a lower hurdle of “not unsuitable”. This bifurcation of the supervision regime makes no sense.

Both advisors and brokers should be clearly working in the best interest of the clients. So why not create a standard and unified regulatory framework, covering all product and financial advice?  Now, I understand ASIC has two departments, separately looking at financial advice and mortgage lending but this is not a good enough reason. Time to put all advice, whether for wealth or lending, under the same regime. Not least because investment property loans are actually about wealth building, and should be considered as part of a wealth management strategy.  One third of mortgages are for investors, and our research highlights investors are more likely to access brokers.

The requirement for transparency, quality of the advice, and consumer outcomes should be the same. Far fetched? No.

The Financial Markets Authority in New Zealand says:

Financial advisers are people who give advice about investing and other financial services and products as part of their job or business. They include financial planners, mortgage and insurance brokers and people working for insurance companies, banks and building societies that provide advice about money, financial products and investing.

They do not have this bifurcation.

All financial advisers must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. In determining what a reasonable financial adviser would do, the following matters must be taken into account:

  • the nature and requirements of the financial adviser’s client or clients
  • the nature of the service and the circumstances in which it is provided
  • the type of financial adviser

See more in section 33 of the Financial Advisers Act 2008. See examples below of how these obligations apply to advice on insurance and credit products.

ASIC Review of Mortgage Broker Remuneration Released

The Treasury has released the ASIC review on mortgage broker remuneration, together with two info-graphics on the industry. The findings will shape the future of the mortgage industry, and are now open for consultation.

Importantly, ASIC says the standard model of upfront and trail commissions creates conflicts of interest.

There are two primary ways in which these conflicts may become evident. Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan). In this report, we have referred to this as a ‘product strategy conflict’. Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’.

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.
ASIC consider that these proposals should be implemented before a further review of the market is conducted in three to four years to determine whether additional changes are required.
They also propose to conduct a targeted review of the suitability of advice
provided by brokers (including through a shadow shopping exercise)
commencing in 2017.

Here is the Treasury release.

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government requested ASIC undertake an industry-wide review of mortgage broker remuneration.

The Review found that the current mortgage broker remuneration and ownership structures create conflicts of interest that may contribute to poor consumer outcomes.

The Review outlines a number of proposals for industry aimed at improving consumer outcomes, including:

  • improving the standard commission model for mortgage brokers;
  • moving away from bonus commissions and soft-dollar benefits;
  • increasing the disclosure of mortgage broker ownership structures; and
  • improving the oversight of mortgage brokers by lenders and aggregators.

The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.

The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Friday, 30 June 2017

Broker clients have ‘extreme’ sensitivity to rate changes

From The Advisor.

A JP Morgan report into the mortgage industry has found that customers who obtained a home loan through a broker are far more sensitive to rate changes than those who visited a bank branch.

The latest Australian Mortgage Industry Report – Volume 24, released yesterday, explores the potential impact on borrowers of significant mortgage repricing as Basel 4 capital requirements loom for Australia’s biggest mortgage providers.

When it came to sensitivity to higher rates, the report found that loans originated by third parties have a substantially higher sensitivity to rate changes. The report noted that this is likely due to larger loans being written by brokers and that broker usage is higher among interest rate sensitive borrowers.

Interestingly, the report noted that interest rate sensitivity is relatively consistent across interest only and principle and interest loans.

Digital Finance Analytics principal Martin North, who collaborated with JP Morgan on the report, said these findings reflect the different mix of customer behaviour and customer types who visit brokers.

“One of the critical things that we look at is whether people are ‘soloists’, meaning that they want the lowest price they can get, or whether they are ‘delegators’, meaning they are more worried about customer experience and the whole package rather than the price,” Mr North explained.

“Price sensitivity is much more extreme for people who go via brokers. There is already an urge to find the best deal if you go to a broker. Secondly, brokers have the ability to look across the market and across multiple lenders and they know from their experience where the best deal might be for a particular borrower at a particular point in time,” he said.

“The net result is that there is a higher risk footprint in loans written via third-party than first-party, and that is something which needs to be recognised in terms of how pricing is done and also how risks are managed.”