ABA and ASIC probe into commissions - Brokers and FP's

Apologies in advance if I have posted in the wrong section of this forum, have perused and thought this section to be most applicable.

So being in finance and hence as to why I find it of a concern is: The industry is currently being reviewed by by ABA and ASIC in respect to commissions being paid and for me what is of particular interest is trail income; bread and butter of a broker business or financial planning business. So for someone looking to get into this business or for someone in the business, are you dedicating any concern considering we and New Zealand are one of the few remains countries paying trail. So for those countries that do not pay trail, how are brokers surviving or how did they make the transition? I guess if you have a business that has a value due to loan book, there are multiple complications to consider? Many banks have used these as security for borrowing purposes, so if the industry all of a sudden says no trail overnight...i.e. Like the greyhound industry in NSW, there would be major complications.....

What are your thoughts?
Would it reduce rates to a consumer in anyway?
Would brokers and FP's be able to survive?


Thanks

 

I expect a reduction in commissions and the scrapping of trail income in particular.

 

At our last PD Day we had a guy speak about his experience with broking in the UK and how different the industry is over there. They have to do a lot more work for less money. There's a lot of loan churning over there. Once any clawback period expires the brokers re-write their clients' loans to get another lot of commission. It's all well to say that trail will be scrapped but will the industry be any better if churn rates dramatically increase?

 

Why do you think trail will be scrapped Terry? Interested to hear your thoughts.

Cheers

Jamie

 

Just a hunch. Trails for financial products for planners have been scrapped, except for insurances, and even insurances commissions were recently cut almost in half.

Trails are also an unusual feature. Why should a broker get a % of the loan for the life of the loan instead of a one off payment - doesn't make sense.

Of course I love trails and hope they don't go, but am not hopeful.

 

I agree with Terry that there could be a reduction in commissions, simply because the major banks will use it as an excuse to do this. Whist the big banks are heavily invested in brokers, brokers also are a source of competition to them and detract from what would otherwise be a monopoly of 4.

There won't be any savings to consumers. Perhaps a little in the short term, but reducing the broker segment again creates more of a monopoly and with less choice, the big banks would ultimately increase rates and costs to consumers. The evidence of this is simple. Bank margins on loans today are only a fraction of what they were 20 years ago prior to the brokers becoming an alternative to the direct bank channels. Hate the idea of commissions all you want, but it's the best thing that's ever happened to borrowers.

The enquiry isn't just aimed at brokers. It's a review of remuneration across all distribution channels and the outcomes for consumers. Several lenders have already started to disassociate incentives from sales targets, but frankly those sales targets are still there. Don't make sales could mean not having a job.

Financial planners have already had commissions removed for most products. It hasn't increased returns or reduced fees to consumers. Consumers are now having to pay for advice which has become more automated and less useful. Almost all planners now work for the major institutions, either directly or through indirect ownership of their firms. Since the FP remuneration review there's been regular scandals in the media, almost monthly covering every major bank and numerous other institutions. This isn't a coincidence.

Overall I think commissions will remain in place, including trails but it will likely be reduced. Many brokers will exit the industry and those remaining will leaner and frankly a whole lot meaner. Churning of customers will increase. Smaller loans and more complex loans (investment loans) will incur additional fees. Many brokers already charge for claw-backs, but after this almost all will.

 

If trail goes I think the outcome will be fairly obvious.
A LOT of brokers will exit the industry and those that stay will have a very hard time of it. I mean after all isn't a brokers selling point that they don't charge to see them? How many consumers will use a broker for a fee over a free bank??

I also think a number of smaller lenders will eventually shut up shop. Nobody without instruction from a broker is going to Pepper, Liberty, Latrobe.etc. Basically if you don't have shop frontage or an agreesive marketing campaign then you won't survive.

The big4 will further monopolise the industry and whilst I hear people saying "great no brokers means banks have more money which means lower interest rates!" Bzzzzzz WRONG! It means take what cash you have in the offset and bang it into big4 bank shares because they are going to clean up.
Far more people through their doors as brokers will be used a lot less and no savings from the broker channel passed on = Big $$$
Chances are without heavy competition rates will go up! I have no doubt the big4 boards are all in cahoots and it's only the fact consumers have so many options now via broker channels they need to behave.

My 2 cents is keep trail but standardize it across the board. There should be no incentives to use lender X for a higher trail. Remove all lender promotions for writing $X business, again NO incentives.
Then brokers should be made to earn trail via mandatory requirements which is basically you cannot set and and forget a loan. Perhaps signed 6 monthly client reviews lodged.

I despise monopolies and this will guarantee create them for the big4.

 

Interesting thoughts Terry.

This is a direct paste from their Prudential Practice Guide that they released at the very early stages of APRA intervention in the market in 2014/15.

In Australia, it is standard market practice to pay brokers either an upfront commission or a trailing commission, or both. Experience has shown that commissions paid upfront tend to encourage less rigorous attention to loan application quality. Trailing commissions are more likely to provide incentives for brokers to retain and monitor customers.

APRA's guideline was about origination quality rather consumer outcomes. In saying that, APRA's rationale for trailing commissions is better ongoing management of existing customers (better consumer outcomes!).

I was one of the industry reps in a session with ASIC a few months ago at the start of their review - by the tone of that discussion (early in the process), i don't think they were inclined to go that extreme. I'd be quite surprised if they targeted trailing commissions. My take out of it is here for those that are interested:

At the end of this i believe there'll be:

• Less broker segmentation within banks (e.g. Flame, Diamond, Elite broker segments).
• More standardisation in broker commissions (like @albanga mentioned). I find its already quite similar, and having a set standard across the board sounds like a good idea. Not sure if its implementable easily.
• Less incentive based quantity measures - e.g. those short term 'extra 0.10% commissions for this window period' will be scrapped.

There's separate reviews going into the different channels of mortgage lending too - so i don't take this review as 'brokers are bad, lets look under the carpet and see what they're up to' - more of a 'whats going on in the industry, are there any adjustments regulators can make to better serve the needs of customers'.

 

Hope you are right Redom

 

Great post Redom, I tend to agree with your analysis of the outcomes. I do think however that lenders will take this as an opportunity to reduce commissions overall, but the basic structure won't really change.

There may also be some criteria put in place such as reviews every 2 years to continue receiving trail. This would generally be positive, but is not without negative consiquences for consumers as well.

One definte good thing is it will put the 'commission debate' to bed once and for all. That discussion is getting very old.

 

Great post Redom - and kudos on being involved in the discussions with ASIC. You're a great rep for the industry.

Cheers

Jamie

 

Thanks fella's.

I like that idea about putting in place constant reviews - again, not sure how that could be implemented in an efficient way by the regulators. There's a few good ideas floating around to improve consumer outcomes - i believe thats where the review will land rather than going further than it needs to. Larger lenders may have something to say about that though, but i'm not sure of their level of influence in this (its regulator based with a wide consultation and data group).

Its encouraging to see some of the industry bodies start to get on the front foot here. I think its very worth to invest time and resources into communicating the benefits of a 'trial' commission model to loan origination quality and ongoing consumer outcomes. It can be quickly perceived that brokers get this 'for nothing' - but i'm sure all of us know here a lot of time, energy and resources go into servicing our existing customer base and constantly assisting them. Personally i think this becomes a full time job after you have a couple hundred clients to look after on its own!

Its probably best viewed as two separate questions; 'what should the overall remuneration of a broker be?' and 'how do we split the overall commission brokers receive up' - rather than 'should trailing commissions be banned altogether' (bad for consumer outcomes).

• Having an upfront commission model only theoretically reduces loan origination quality (as APRA have mentioned). Having a larger split of the overall commission paid over a period of time rather than in an upfront manner promotes better quality submissions. Large upfront commissions alone create larger incentives to operate in the grey to get deals done. Whereas having trailing commissions paid promotes ongoing quality over the life of the loan. This should theoretically have a minor impact on delinquencies, instances of fraud, etc.
• Consumer outcomes - having a broker service your existing loan needs obviously adds to the service quality. I appreciate that brokers can do better here - most consumer surveys seem to suggest this is a major point of improvement.

Cheers,
Redom

 

I actually thing the balance at the moment is fairly reasonable. It's already a very difficult for new entrants to get started. Putting less weight on the upfront component makes it harder for new entrants. I agree putting more weight on upfronts discourages long term customer care and makes finance more 'transactional'.

My biggest concern with ongoing reviews is how it's implemented and verified. A financial planner I once spoke to sends me an automated letter every year that's completely irrelevant to my circumstances and I don't even have any business with them anymore. It's utterly pointless, but I'm sure they've got an audit trail to say they contacted me if they're ever required to prove it.

The other challenge is if brokers are expected to formally service client (which I approve of), then brokers need to be given the tools to do this property. Macquarie is doing a great job of this at the moment, but other lenders have got a lot of catch up to do.