“The biggest winners of a fee for service would be the major lenders”

Loan Market Chairman Sam White says he’s not surprised that fee-for-service is now being supported as a legitimate way of paying brokers in the future, especially when one looks at who is backing this model.

“The biggest winners of a fee-for-service would be the major lenders who would effectively have a reduction in competition and a massive savings to their distribution costs. If I was running a major bank I’d be asking for the same things,” he said.

During a speech last week, Westpac’s CEO Brian Hartzer said the option of customers paying brokers directly could be considered as a way of making commissions more transparent and helping customers make more informed choices. Although, he did add that “the consequences of such a change for all stakeholders would need to be considered carefully”.

White says he understands the logical appeal of fee-for-service from a regulator’s or a consumer’s perspective, but the consequences of adopting that model could result in reduced competition and a much smaller broking market.

“I don’t think it would spell the end of the broker industry, but I think it would pose significant challenges for how the industry operates today and how we work through those. A lot of work would be needed to work that out,” White says.

ASIC wrote in its submission to the royal commission that flat fee remuneration arrangements exist in the Netherlands and that structure has not undermined the existence of the broking sector.

Lack of hard data and evidence

Smartline wrote in its submission to the royal commission that the commission has not received any direct evidence that upfront and trail lead to poor consumer outcomes besides a self-interested and confidential letter from CBA CEO Ian Narev to Stephen Sedgwick for the Retail Banking Remuneration Review. That letter was cited by CBA executives during their royal commission hearings.

Smartline and Loan Market’s White both pointed to ASIC’s review of mortgage broker remuneration from last year as a better data-driven indicator of the broking market and what issues need to be addressed. ASIC concluded that while certain aspects of remuneration needed to be altered, upfront and trail did not lead to poor outcomes overall.

Smartline published the upfront commission rates and loan volumes of its top 20 lenders in 2015, 2016 and 2017 showing that there is no correlation in the level of commission paid by the lender and the volume of loans directed by brokers to that lender.

White also pointed out that one can just look at the data in the banks’ own loan books.

“By their own admission, their books are ‘healthy’ and mortgage brokers represent over half of those customers. There is a disconnect between the service currently being provided by brokers and the call to move to a fee-for-service,” he said.