Banking Royal Commission Reports & Government reponse

to be honest a flat fee for brokers seems to make more sense than a percentage as how much more time is spent getting a 2M loan vs 500K loan. At the moment the 2M borrower is subsidising the 500K borrower (this is pretty common in a socialist environment)

I wonder with a flat fee will it be still in the form of a commission with fee only payable if the loan goes through or is it Puplebricks style?

Same goes with agent commission selling a 2M property and a 500K property

AFR article said it would more than halve the value of broker businesses if reform goes through with currently values at 2.5X reducing to around 1X (interesting stuff)

 

Because they don’t pay it now and they won’t pay it at the banks which basically means you need to pay a premium to see a broker.

The major issue here is that people simply don’t know what they don’t know. The reality is that majority of working Australians can get a loan from the Big4. So if that’s the case and not knowing what they don’t know what do you think most people will do when presented with $0 versus $2,000+ upfront?

Ofcourse they will go down the $0 path unaware of the potential problems.

I’m sure the brokers on here could write a thesis on why but just a few:
- People are going to choose the first of the Big4 that they see who says looks good. So they will have no idea if this is even the best product.
- The banks will very unlikely stucture them correctly and you can guarantee cross collaterise them.
- They will take bank Val’s as gospel. Most people have no idea that banks even have different valuers. This alone could create ALL sorts of trouble.
- Today you will be dealing with manager Bob and tomorrow manager Jane.

The point is people will be absolutely oblivious to the fact that going direct is likely costing them thousands more than the upfront fee.
We humans are built this way. Majority of us are shortsighted and this is never going to change.

So I have no doubt at all that brokers are worth every cent and more but I live and breath property. Most people think all loans are the same. If these people leave seeing brokers (Which 90% will). Then the industry is destroyed.

 

Ask the average person: is it better to have
a higher lvr and or higher loan balance with the extra in the offset, or

lower lvr or loan balance with no offset.

Watch what they think is good.

Then ask then which is better if they lose their job, lower income from having kids, need to buy a car.

What if no one ever asks them that second question?

 

The problem is, that there's a lot of groups suggesting that this will actually benefit consumers. They've never read or even heard of the recent Delloit report that demonstrates that mortgage brokers are cheaper for banks their their own staff. They think that be removing commissions everyone will benefit from a rate reduction.

I don't think there'll be a huge fuss. More like a whimper which will be dismissed as a dying industry which will be perceived to be self serving.

I think I'll become an astronaut. That sounds like fun. Perhaps a fire fighter.

 

Some of the biggest operators I know, work from the kitchen table (as you put it) mostly all ex big 4.

I don't think it will be ok for them to be honest

 

I actually think some of this may go away and there will be a sustainable mortgage broking industry in a few years. I'm trying not to sound rose tinted, just applying my own knowledge of how the treasurer's office works and how 'markets' based decisions are usually made. I spent a year in the remuneration of financial sector division @ markets group @ treasury, this is the group any working group on broker remuneration will sit if labor win the election. A lot of consultation will go on and on, it will drag out & the appetite to change this will be limited by then.

Yes brokers are going to be hit, the trail book value has greatly diminished & trails will go. There's certainly debate as to whether trail helps or hinders customers. Nonetheless, competition won't go if trails simply go and a move to an upfront/limited deferral remuneration system is applied.

If I'm sitting in the T/O's office and actually making policy again, I'd be telling the Treasurer exactly what his staffers already have:

- The politics of accepting all the RC recommendations are good. Politically it may make sense to simply agree to them in full.

- Nonetheless, moving to user pays damages competition, hurts industry & will reduce access to credit to many borrowers across the country. Essentially it is not a good idea to make the mortgage broking industry go out of business.

It was a bold call by the Treasurer to reject the RC recommendation on the banning on trail, 3 months before an election and with a lot of political heat associated with the RC itself. His actual proposal of a review in 3 years is very very soft. It's basically saying he doesn't want to do it. A 'review' in 3 years is just a governments way of saying no. They do this regularly when they want to say no. Push it far enough, the spotlight will be off and it doesn't matter anymore.

Now if I've got exactly the same role, under a Labor government sitting with Bowen (who was Treasurer under Rudd before, and reasonable/savvy too), my advice wouldn't be too dissimilar. In fact it would go a fair bit further to the above:

- Removing brokers will directly assist big banks

- It will reduce access to credit for those that are most vulnerable. That is, to our base. It will make access to mortgage advisers and quality advice available ONLY to those who have more resources. This is not a good thing.

- Nonetheless, the politics don't matter too much. The RC was a while ago, its left people's minds and we can backtrack out of this pretty easily. This won't really turn votes either way in any significant way.

- Going further, industry consultation will take place and this will weed out the idea of a user pays model.

Overall, if I had to guess where it will land over the next three years is:
- Greatly reduced trail book values
- Reduction in overall remuneration to brokerages associated with no trail and upfront not compensating it
- Broking generally being a 'low value' business, given there's no real asset created in the future other than marginal goodwill (which is often tied to the individual). This should lead to some consolidation within the industry.
- A sustainable broking industry in the future, where half of all loans + are still originated via this channel.

Overall, its certainly not a good outcome at all to brokers. But I dont think it will land at a user pay model only anytime soon. I don't think this helps customers in practical terms (in theory it does, Hayne isn't wrong about that, but we dont live in theory land). It may work at some point in the future, but technology will drive that, not a RC.

 

The banks really are loving this.

The costs of establishing a loan are already built into the loan pricing (has anyone noticed that banks aren’t losing money lately?)
Now, the banks get to remove the costs of paying a third party (brokers) for establishing the loan or change the consumer that cost (plus probably a mark up of just a little bit (800% should do it). And I’m sure they are smart enough to figure out a way to do both of the above.

How does this possibly benefit the consumer if we now all need to pay an additional $5k for a loan?

Blacky

 

For several days I have wondered why Hayne didnt consider and recommend an alternative model where the (regulated) fee is paid by a lender to the consumer (not the broker) who is then free to use market forces to use a broker who offer a market competitive fee or take a loan reduction for the fee credited if they are a direct borrower with a lender. The change could even apply retrospectively to trail so the consumer wins and not the lender who will obviously not pass on any saving.

This better fits with the wholesale v retail concept. Competition is not lessened and brokers are encouraged to be at mercy of competitive forces that are price and product focussed.

Its a big omission. It looks like the banks wrote their own recommendation on this one. I thought the Commission has found fault with lenders and wanted to fix it. All they seem to have done is shift the consumer harm to brokers.

I cant help but feel we will hear from the ACCC at some stage.

 

Have they thought of providing transparency by stating trail commissions on mortgage statements as well as in upfront discussions with brokers.

I personally prefer the broker model largely as it stands. Have had great service from the broker I used.

 

This is stated on both loan offer documents and documentation from the broker.

The problem is that for compliance reasons we're now producing a small mountain of paperwork. This gets burred, people just don't read it. The RC recommended that brokers become more like financial planners, providing a statement of advice. Another 60 pages straight from a template, how does this improve anything?

The reality is most borrowers don't care how much brokers are paid. They want to know they've got a good deal. If we demonstrate this, most people don't look beyond it.

 

Maybe political advisor might be a good career choice for you in future @Redom seeing as though brokers are dead in the water. Happy to have you by my side when I run for PM.

 

More than happy to say 'lunch on me' for the next few years provided the service is excellent.

 

I also don’t believe they will move to a client paid model BUT without trail you have lost half your revenue.

Unless the upfronts are increased significantly to cater for this then how does it make it viable?
As I keep saying, you have already taken a big pay cut in terms of time with all the recent changes for loan processing.

You have also lost your asset.

It has been well documented that brokers average salary after costs is $80,000.
As of next year assuming no change to upfronts this is say $40,000-$50,000.

This means your banking (pardon the pun) on decreased brokers to obtain more business to cover the shortfall.

With all the stress and compliance...I just don’t get it.

 

I work from an office at home myself, but I also employ staff. Under the proposed changes, anyone who employs staff - and if they're big, they certainly do, or have large out-sourcing costs - simply won't be able continue without sacking everyone and literally doing it all themselves. And that's no fun - you're back to owning a job, not a business.

 

And good luck with FWC after sacking staff....

 

Agree - this is the environment brokers will face. An industry that is less profitable than it was last week. Upfronts will improve, but it won't be a full revenue match. Overall the industry will consolidate, but it will be marginal if the move is simply to an upfront payment only.

Nonetheless, the positive out of this is customers will still be able to engage the broker community and have a wide range of choice.

 

Yup - best to wind up the biz and be a sole trader. No thanks.

 

Going it alone won't be viable either. Staff will need to be sacked. It's business.