Value of mortgage brokers business post royal commission

Pretty much everything ASIC identified in their report was based around the potential of a conflict of interest, there was almost no evidence to suggest an actual conflict of interest was occurring.

ASIC actually supported the current commission structure. They also recognised that brokers bring a significant amount of competition to the market.

The industry has responded by putting together a 'Combined Industry Forum' which has brought together brokers, broker associations, aggregations, lenders, the banking association, consumer groups and other interested parties to address the potential conflicts in the broker market. For the most part, the response from most parties to what they're doing has been quite positive.

The information coming from the Royal Commission, Sedgwick Report and productivity commission has all been based on opinions. None of these forums has actually collected any data or performed any analysis. Most of the negative comments about broker remuneration and the broker market has come from parties that have an interest in getting rid of mortgage brokers.

If you want to understand what value mortgage brokers bring to consumers, do a bit of research around the margins the big banks were charging in the 1990s before mortgage brokers, compared to the margins the banks make on loans today. If it weren't for brokers, your home loan rate today would start with a 5 or 6, rather than a 3.

 

Cash rate halved 90' > 92'

 

ASIC based the recommendations on research that didnt disclose specific examples but practices are well mentioned in the report. Nobody wants to air their dirty laundry and its not ASIC role to report each example as its confidential. Obviously banks want to throw the brokers to the kerb in the chase to minimise sharing income. Its a great defence to blame others. They could not do it with the insurance scams, financial planner fiasco, owning insurance arms and other product providers and so why not discredit external brokers ?

http://download.asic.gov.au/media/4213629/rep516-published-16-3-2017-1.pdf

There probably is scope to trim broker fees based on larger loans etc and the numbers of brokers and deal with conflicted remuneration. But ASIC have identified the benefits brokers do bring. And identified that some other who get paid kickbacks (eg accountants) is a troubling issue.

In the 1990's pre-aussie, brokers were hardly an industry. There were order takers referring loans to lenders. Aussie was different and triggered non-bank lenders with competition in price and services (come to your home !!) ...1992 changed the whole scene.

Banks must hate that they now have to compete due to mortgage brokers. And not all brokers are doing good work but most do - Some are shonks like any industry. The NAB seem to have found that but what did they do about it ? Not a lot.

 

A few random observations:

- I think in general, for a market so big, it does make sense to review how origination works thoroughly. Unfortunately, the process of actually doing this, gives voice to large vested interests that have difficulties putting their own agenda to the side.

- Almost certain existing trial will remain, even in CBA's submission to the RC, they noted it should stay. So many moving parts to the question about value of trail books. I would assume the supply would increase big time as plenty of brokers would leave the market with large income drops. Not sure how demand will change and who actually purchases these books. If its just an investment in an income stream thats been built, than i suspect that demand will remain. If its other brokers purchasing, than the value will likely drop given the supply of books that will be available.

- there's probably value in thinking about how home lending market should work, which this exercise appears to be doing. There's definitely a lot of vested interests flying around and large corporations pushing their own agenda. Its hard to read between all the noise. The RC are rightly considering how it works now and what scope there is to make it work better. Change will hit brokers hard though, so obviously there's a lot of fear in the broking industry now.

- From a policy standpoint, the world where brokers began and disrupted the industry for the better in the 90s has changed significantly. The environment is different. There's far better access to information than ever before. This information transparency creates a different market dynamic and allows market participants to be different. There may be scope for efficiency here in producing better market outcomes at lower cost. This is not just broking, its plenty of industries that are adjusting as a result of information transparency in this environment. Broking is more difficult to change, as it requires a large number of players to move together (competitive issues) or a regulatory momentum to force it.

- The information transparency is a big change to the value of the broking model. It allows for competitive dynamics to work without such a large influence of brokers. Maybe not tomorrow, but certainly in the medium term where distribution channels can adjust and use the ease/transparency of information to reach consumers with accurate information. The broker, who has played a MASSIVE role in this function over the last 20 years, isn't as 'massive' anymore. Tech, automation, social media, etc have all made this easier to do than 30 years ago.

I used to work in the markets team at Treasury that reviewed individual markets and processes. At the time, it was post GFC fin market regulation that was flowing through. Brokers weren't the focus then (it was execs, fin market reg, etc). The process for regulatory change for different industries is relatively similar though. Any recommendation the RC, ASIC, APRA, etc make, will likely have to go through this broad mechanism:

- Reviews make some recommendation to government. This is currently happening. Big banks are trying to force it, brokers are trying to stop it, regulators are trying to review it. Etc.
- Government (i.e. Treasury, PMC (if its important enough), etc) will review it. Take on board reviews.
- Make recommendation to relevant minister, who signs off on the change and then sells it to the public. For this type of thing, they'll just leave it to the policy people IMO given there's so much work going on.
- There's usually some form of consultation here, but this may be encapsulated in the reviews already taking place.

The team at Treasury will look at it from the above microscope to begin with. I can't see them protecting the industry. They'll look at it from the above microscope. If the reviews come to some drastic conclusions, they're likely to lead to actual change (unless political winds change).