Banking Royal Commission, Did the Customer Really Win?
As the head of a Fintech who’s online platform operates in direct competition to traditional brokers, I find myself advocating for the broker industry.
Who do you think you’re banking with?
The commissioners report is welcomed and all 76 recommendations should be implemented with best customer outcome in-mind. In my opinion, the following recommendation if implemented as suggested by the commissioner will only have drastic and negative consequences for the consumer and will have a flow on impact on the Australian economy.
In regards to recommendation by subject matter (3.1 Banking), recommendation 1.3 – Mortgage broker remuneration. The commissioner states, the borrower, not the lender, should pay the broker a fee for acting in connection with home lending. By recommending as such the commissioner has failed to fully comprehend the adverse result this recommendation will produce for the consumer and the economy.
Keeping in mind mortgage is an income producing asset for a lender;
Both the Productivity Commission and the Sedgwick reports concluded that if borrowers had to pay the broker, they will not use their service. This was confirmed by an independent survey, which found that over 96% of borrowers were satisfied with their broker however only 58% would be willing to pay for their service. The winner will only be banks with large branch network, be it under their main brand or one of their secondary brands;
Regional banks and customer owned banks i.e. Credit Unions and Building Societies will incur serious financial losses. In 2012, there were 105 customer owned mutual, today 66 and these financial institutes are surviving purely due to loans written by brokers in lieu of them having branch network exposure. Some Regional and customer owned banks are now getting over 50% of all their home loans via the broker channel and taking this away will only lead to further demise of this sector;
There are over 17,000 mortgage brokers in Australia and according to Mortgage & Finance Association of Australia, they make an average of $142,000 per year. The commissioner’s recommendation will effectively make most of these brokers unemployed and as most of them work on sole trader basis, the Federal treasury will lose all tax payable on their income. The 17,000 brokers do not include any unaccredited loan processors or administrative staff a broker may be employing under them;
Secondary businesses associated with the mortgage brokers will become commercially unviable, businesses consisting of Aggregators, CRM providers and domestic based loans processors outsourcing services. Demise of the broker industry would lead to employees of this businesses to lose their jobs and with it, their capacity to fund their lifestyle;
Fintech’s operating as online mortgage brokers will suffer the same consequence as customer owned banks and secondary businesses in becoming commercially unviable, as the borrower would most definitely balk when presented with a payment option page during the online application process. The fintech could than potentially change their focus to commercial lending, this would involve finding a financier who would be willing to provide them with lending capital. I cannot see this happening quickly (if at all) as it will take time for all the due diligence to be completed. In the meantime, employees of these businesses would have to be made redundant;
Moving the cost burden of getting a mortgage to the borrower and away from the lender will only allow the banks to fatten their profit margin. It is unthinkable that the banks will pass the cost saving on to the borrower through lower mortgage rates, history has shown that the banks will take every opportunity presented to extend its net interest margins. The borrower will incur a double whammy if they choose to use a broker, fees to get the mortgage and no reduced interest rates offering in exchanged of cost saved by the banks.
Credit Suisse estimates that the total commission saved by the 4 major banks over 5 years if lender pay model is abolished will be approximately 1.8 billion dollars. This is likely to go straight into boosting the banks bottom line rather than discounted rates for the borrow.
I do believe that the broker industry needs to change, barriers to entry are too low and any Tom, Dick and Mary can call themselves an expert. This is all too obvious by some of the videos being posted by brokers on Linkedin and hopefully loss of trail income may start to filter some of them out. Brokers however are very much needed to ensure that smaller lender survive, and the Banking RC recommendation takes the power away from the consumer by restricting their choices.