Banking Royal Commission results

I got out of the broking industry, briefly, because of the changes brought about by the introduction of the NCCP Act. I quickly got back into it as it still pays better than law and tax. Fears people had back then did not eventuate and I suspect the same or similar would happen this time too. Don't worry till it happens, and then plan around it.

 

That's the thing. One of the most important things I get from my broker is the post-sale service such as annual portfolio review, strategy development and adjustment (a lot of these tasks I take the lead but MB feedback is always needed). Not to mention quick valuation/estimation for potential IPs that I am checking.

 

I am sad to hear that you have bad experience with your broker but not all of them are like that. Indeed, the majority of MBs are really good and always act on client's interest imo. There are always good and bad guys in any industry.

 

So you should be quite happy to pay for this service directly to the broker - or do you only want this service if it is "free".

Definitely a tough thing to actually have to ask a customer to pay you for the product you supply. Far easier to have it bundled and hidden.

 

Wow, not much love for mortgage brokers out there. They're really digging into them.

‘All of a sudden they have to come up with $5000’

 

Well, this is the RC that BS and the ALP wanted .

I am always a big believer in “If you don’t know the answer, don’t ask the question “ .

Will BS and the ALP accept responsibility for the (unintended) consequences of this RC ?

 

I've been heavily involved in the travel agency industry in the past and they pay themselves in a similar manner to mortgage brokers (from what I can tell).

What do you think happens when an airline or hotel chain decides to pay the travel agents less commission than the others do ? Generally the customer will have to be very specific to see that option.

 

You can bet no on that one.

 

Here's what I think will happen to the industry over the next 2 years or so....

A lot of brokers are already planning to leave the market. Not for lack of trying, but it's an aging industry because there are very high barriers to successful entry. A lot of young people try to make it work, but leave within a year or two. Most of these people will head into retirement.

A lot of part time brokers will quit. It's simply not even worth trying to make it work.

For those that are left by the end of the year, there will be a lot more business available. 60% of borrowers choose a broker, that's not going to change this year and there will be a lot less brokers to service this need. The next 18 months are going to be busy for some brokers.

What happens next depends on what is actually implemented from the RC report. Trail income is as good as gone, we're just waiting for the end date. The government has adopted a 'wait and see' attitude on upfront commissions (the opposition has said they'll implement all recommendations).

If upfront commissions do remain in place, the few remaining brokers will need to change their business to be more efficient and possibly generate other revenue streams. With all the changes in lending over the past 4 years there's actually a lot that can be done here. Some brokers would survive. They'd probably employ a hybrid model of an upfront commission plus a fee for service for the more complicated deals (which the complicated clients may be quite willing to pay).

If upfront commissions do end, then very few brokers will remain. I fear that those who survive this would be the ones who either operate in the really nasty parts of lending, or those who are incredible sales people.


Other industries will be impacted by this. Buyers agents and brokers often have excellent relationships. A lot of builders depend on brokers to get the tricky deals funded. That has the potential to trickle down into so many other things, but it's probably a pain requiring a bit of TLC, not surgery.

As for me, I'm in the wait an see camp. I'm too young to retire. This could be an opportunity for a fresh start, or to evolve my business into something else. This has derailed a lot of plans that I had, but I've been working through some things for the past few days and it's not the end of the world.

 

Members of the PC community have been very kind in words of support. My phone & emails have gone off over the last 48 hours with kind messages. I'm sure i'm not alone in the broking community appreciating all the kind messages from broker supporters. Thank you.

Overall my general summary of broking business & industry for those that are interested:

- Trail book values have just got smashed. The run-off rates will increase much faster in a world where there is no trail (reason explained below). I'm not sure to what degree, but looking at mortgage choice's stock price reduction, i'd say 30%+ is the starting point. Reading through the RC report, at some point in the very distant future, grandfathering of existing trails will likely be removed too, so there's a value hit there too (lifetime annuity concept doesn't hold reading RC views on conflicted remuneration).

- The general lifetime revenue associated with serving clients has gone down. From June 2020 in a world without trails and upfront only, upfront revenues won't adjust $ for $. IMO there'll be at least a 20-40% cut in overall remuneration. 2019 has begun with a ~10% cut from CIF changes too.

- Nonetheless, the broking industry can survive a no trail commission model, albeit taking a hit to revenue noted above. It will adapt and survive. I don't imagine 20,000 jobs to go, at least not at this point. Some will shed. The cash flow upfront may actually improve marginally (slight upfront improvement) which helps sustain businesses, but there's little value to the business itself.

The unintended consequence of this is the average loan life in Australia will fall (lower trail book value) & that the broking industry will become a little bit more transactional in nature. This is partly because of conflicted remuneration structures that incentivise this. I'm not necessarily sure whether this is a bad thing, but an experience felt by our counterparts in the UK & NZ following similar trail commission bans. NZ business owners define it as an adjustment that created a 'hunter' mentality. Currently established broking businesses spend a lot of time, resources and energy serving existing clients needs. Other countries experiences suggest that this may adjust to cost/revenue pressures.

- The broking industry cannot survive a no commission model. If Hayne's suggestion is implemented in full, broking in general won't exist within 3-5 years. Very few small niche operators will provide some service, but it will be very different to todays one and there'll need to be far greater additional value provided (similar to financial planning services).

- Hayne's suggestion to make customers pay an origination fee for using the bank doesn't work either. This is bad for customers, so it won't fly.

 

I will be happy to pay for MB services but the question is how much and how often. If I need to pay let say $2.5k for a loan app, that's fine. Then every year another couple of grants for feedback/advice, probably yes, probably no. The main point here is this RC recommendations basically pass the cost from banks to customers. Banks will not drop their rates or pass any saving to customers. And customers will need to pay more for mortgage and related services. I thought this whole RC is to investigate the bad things done by banks and punish them. It turns out to be opposite. It is so easy to target MBs instead of the big banks. The whole show is a joke with cherry picked stories and blatant lies.

 

I knew the answer.

That is why I ask the question

 

One phrase:

The politics will decide.

Back to the jigsaw

 

Bundled and Hidden Assumes that if banks don’t have to pay brokers that rates will then drop?
This is hilariously laughable at best! Banks will not drop a dime, if anything with opposition obliterated they will raise rates even more.

Anyone who thinks the cut of commissions paid from the banks to brokers is going to be passed on is absolutely kidding themselves.

 

I agree with you and I'm not sure what the answer is - MB is a funny industry.

I prefer to pay professionals directly and know that they represent my interests only (or chose to do the work myself where I can). We use a MB and highly value what they do for us.

The advice on here (in other contexts) is to follow the money trail to see who the agent is representing - I guess it is just that the banks are so powerful anyway.

 

Or banks slowing having their own channel and reduce use of brokers channel and tell the regulator see we are the good guys, we don't use broker much any more they are the bad guys of the report

CBA started this Journey 2 years ago and they now 60% own channel 40% brokers and they aim to reduce it further

and they all came out and claiming credits for getting ahead and implement things government don't even do while fattening their own

 

I saw it mentioned elsewhere that another country had gone to a User pays model, with the banks also having to charge a fee (some sort of minimum regulated rate).

I'd imagine that will have to be the model to preserve competition (assuming Labor follow all recommendations). Presumably a broker might charge a certain fee for a simple lodgement, with extra added on fees for more complexity/other services.

From there the industry would right-size itself around that fee. That will also happen regardless if they increase the Training Requirements.

 

Thats pretty scary all considering.

 

Great post, my feeling is "adversity creates opportunity" - I have been saying that for the last few years as every area of my business has been targetted by regulation including:
1. End of accountants exemption, become a financial planner and FOFA
2. SMSF Audit registration
3. AFSL Costs to become a FP and then ASIC cancels the AFSL
4. Employing staff
5. SMSF lending to be banned
6. Lending for OTP purchases in SMSFs
7. APRA crackdown on investor loans

All of these had a significant impact on my business and as a result, this adversity made me be proactive to "face" the changes. I have, but it has hurt with a significant increase in compliance and "operating" costs.

Here, I cannot see this industry adjusting to the change. A supply side fee for service just won't work and cannot be productive. ITs similar to FPs charging fee for service for insurance, for a loan, you will charge a client a upfront fee of XXX but submitting a $500k loan will still cost you $2000 like it does now (not incorporating aggregator costs), what if the loan is not approved and you need to submit to multiple lenders? what about the risk? what about the best interests duty which I hear may be the sleeper in this report?

With no upfront and no trail, MB are dead.

I'd love to post a pic but a good mortgage broker friend of mine has a "FOR LEASE" Sign on his office window. Pretty sad. Another broker has already signed up for Liberty.

I do get - like FP, that with less, it creates opportunity, however in FP advisers are paying $1k to fund ASIC to target them. Yes, you are paying to be prosecuted. Stuff that.

Lets see what happens. But its doomsday for mortgage brokers.

Cheers Ivan

 

Government is corrupt.........and has 0 power on big 4.