Broker remuneration - lender fee for service model coming soon

So it looks like we're nearing the culmination of 18-24 months of reviewing the mortgage broking industry. Unsurprisingly, it looks as though the banks will take this as an opportunity to introduce alternative remuneration arrangements that will likely result in lower payments and cost cutting to the broking industry.

The ABA (the Bankers Association that represents Banks)- review into remuneration arrangements came out late last week and they recommended a 'lender based fee for service' model to broking. This model should be less weighted to 'volume' but include other metrics to remuneration. Interestingly, specific mention to maintain some form of trailing payments.

In the last 24-48 hours, all four major banks have agreed to implement the changes as soon as possible.

At this point, its uncertain what the design of remuneration payments may look like, but can make a few educated guesses about what they will seek to do:

1. I imagine they'll seek consolidation in the mortgage broking industry (i.e. fewer, but higher performing brokers). CBA have been saying this at their diamond broker conferences of late.
2. A lowering of their cost base - i.e. less payments made overall to the industry.
3. More incentives to shift consumers to the retail channel (they won't say this publicly too much though, but it suits them).

My thoughts on what this will mean for the industry:

• Drop in overall remuneration for brokers. Likely to shift a focus on cost cutting.
• Will taper the growth rate to the brokerage industry (trending upwards).
• It will lead to a material fall in the number of brokers in the industry over the medium term.
• Smaller brokerages (one person brokerages, part timers etc) - to be targeted the most. I suspect there'll be a higher payment to quality brokers (measured by volume, quality metrics).
  • I imagine if your not writing 30-50m+, the banks don't want you.
  • Also smaller trial books will make this harder to absorb as a business.
• Overall potential improvements to the 'professionalism' of the industry. Less numbers, but better quality.
• I hope this doesn't impact competitive dynamics with smaller lenders who obtain most of their market share via broker channel - that would not be a good outcome for the consumer.

An actual play by play of how this has come about:

• ASIC reviewed mortgage broker remuneration impact on consumer outcomes.
• No major recommendations made, other than removing soft dollar incentives and volume bonuses. No changes to existing trial or upfront model, other than a recommendation to review it again in 4 years.
• The ABA - the bankers association that represents the banks - concurrently did a review.
• That review, said the model doesn't work and needs to be changed.
• A 'lender based' fee for service model proposed.
• Big 4 lenders have immediately come out in support of the review and pledged to action all 21 recommendations by this July or next financial year at latest.

IMO, no surprises here, i've listed what i thought would happen on separate threads. I thought it would all play out this way and that banks would take this as an opportunity to cost cut via the broker channel. They've been 'signalling' it since last AGM season where CEO's (Narev in particular).
(ASIC review on mortgage broking industry).

Actual words and source:

• An alternative to a value-related commission, therefore, might be fees for service paid by the bank but set either as a flat amount or related to the characteristics of the borrower.
  • ABA review: http://retailbankingremreview.com.au/wp-content/uploads/2017/04/FINAL_Rem-Review-Report.pdf
  • Bank response: Major banks to change broker commissions

 

Thanks @Redom waiting for you to comment on this.

While I have been working as a broker for a long time, I'm new to working for myself.

Btw working as a one man band is far too difficult these days with the amount of compliance and data entry.

Once upon a time you sat down with a client, completed and signed the app from and faxed it off with a couple of payslips. And the bdms delivered the app forms. (Brochure delivery men).

What's lender based fee for service mean?

 

Lender fee for service means we will be remunerated a flat fee or a fee based on other metrics. Not a percentage of the loan amount as it is now.


I.e A way for lenders to cap the amount they have to pay brokers.

 

With some brokers with a 2 week diploma earning more than a heart surgeon something had to be done.

 

Really?

Don't you think the broker with a two week diploma who earns more than a heart surgeon must be bringing a lot of value to the market place? After all, in a capitalist society it is the only way for this to be possible.

That's like saying the guy who made millions from inventing and patenting the pool noodle doesn't deserve his fortune because he doesn't have a doctorate.

Don't get me wrong, I'm not saying the brokers role is more important than the surgeon but to say they should get paid less due to the easy entry path is ridiculous....Unfortunately, the surgeon's income is limited by his own two highly skilled hands.

 

That was a phrase a jealous bdm used on me once.

Brokers are highly paid though and with increasing prices and loan amounts the commission's are rising rapidly. Periodically the banks need to rejig it. Think the last time was about 2007 when they reduced ups and cut trails in half.

I am all for earning more myself

 

Mightn't the big four reducing comm mean more business potentially for smaller and non bank lenders perhaps?

 

Yet........
The real estate and advocacy industry where we have people flocking OTP lemons to the uneducated on masssive kickbacks are free to play Scrooge McDuck in all the money they are making.

Oh but that puts more money in the banks pockets so nothing to see here people.

 

CBA in particular has definitely been signalling their desire to work with specific higher volume brokers - I've heard the same thing as you Redom. I do think between regulatory and lender changes we'll see a significant fall in the numbers of brokers. There's a huge glut at this time which isn't commensurate with lending growth numbers - in some markets this has meant that broker numbers have increased by 10%, whilst the actual amount of loans written in the total market fell by 5%.

Small indie firms will definitely suffer - especially with the Sydney market not representing the easy cash grab anymore that a lot of new entrant brokers viewed it as. Interesting times as usual.

 

Its good i think, means there'll be some serious players in the industry get paid commensurate with their efforts. And those that think ya do the diploma, sign up to the forums and make millions will get a reality check.

 

Other lenders will follow sooner rather than later.

Do you think it's the best thing in he consumers interest that broker numbers reduce leading to more market share going direct to banks? Remember, a lot of second tier lenders only survive because of the broker market.

Any person who does the diploma doesn't need a pay cut to realise that there isn't easy millions in broking either. They learn that lesson in the first 12 months. Being a small business owner yourself, you would know that there is no such thing as easy money.

 

Depends.
There are some quality back of house contractors who will do full service - supply completed fact find and initial docs, they chase balance of docs, complete, submit, talk to banks, chase status, speak to clients, all the way to settlement. - even supply post settlement letter.
$300 per deal. $150 up front, $150 on settlement. So would only give them the deals that are looking solid and it's $150 down the drain.

For a 1 man band, if you have the ability to generate business, close prospective deals and get face time, why not use such a service?
Sure there are the shortcomings, but if it means you could spend that time on value add service or holistic client management instead of fixing error messages on lodgement software for 10+ hours per week, why wouldn't you?
But it comes back to the ability to generate more deals, not just being lazy broker.

 

Indeed. I'm a bit of a lazy broker. That's why I'm in sales. Being paid per hour of actual work??? Nah...

$300 per deal sounds pretty good. But I'd be worried outsourcing that upfront stuff. Might have issues with compliance.

I thought contractors usually picked up the file after submission?

In any case at $300 a deal it would be cost effective to employ someone if you are doing more than 3 deals a week.

 

This is what I think will happen.

1) maximum commission per loan transaction capped at say $3500.
2) minimum commission per loan transaction....nah wont happen.
3) reduced commission rate for over 80%
4) reduced commission rate for IO
5) utilisation claw back clauses on net loan balances (loan less offset) at 12 months etc

 

I believe the recommendations will involve a hell of a lot of rethinking in industry. Ideas like weighting better loans with a better fee make sense.. eg IO deals for investors have a reduced weighting but a low LVR owner occupied is higher rated. A scorecard that adversely paints the broker ? Its not like brokers make anyone borrow - Isnt a credit report specifically a way lender use to paint the borrower. Unfair to double count and smack the broker IMO. But there are brokers with questionable practices....Always will be a minority of problems in any industry.

The cynical side of me wonders if the banks think they won powerball. They can cut fees and blame a government review.

 

Your mad if you dont or more accurately you will go mad if you dont.

I was talking to an aggregator insider and he reckons 80% of brokers do the whole lot and write less than 1.5 mill/month. The old 80/20 rule at play.

I would rather concentrate on the 20% of tasks that are income producing an the other 80% you pay a competent inhouse person to fulfill. Thats my model and Im thinking about how I can get the 20% down to 10% and then eventually 0%. Now that is a true business model

 

I've written $4m in a month without support and I did go insane.

I've also written $4m in a month, outsourced the back office and I still go a bit loopy.

Outsourcing helps, but I'm fast coming to the conclusion that it's not the ideal solution. If I can get one of those outsourcing people to work directly from my office, I'd probably have a much better time.

So I'm planning to hire someone in the very near future. If anyone is interested, by all means get in touch. I don't have a job description yet, but credit experience would be ideal. Minimum 25 hours per week, but I could handle full time. Very flexible hours and conditions.