James Eyers| Australian Financial Review| 15 February 2019
The elimination of mortgage broking trailing commissions will halve the average annual income of a broker to $40,000, triggering an exodus from the industry and choking off bricks-and-mortar distribution for small and foreign home-loan lenders, says Aussie Home Loans chief James Symond.
He warns the industry is being reshaped following a royal commission process that had allowed limited right of reply to allegations and no consultation, as he mobilises brokers around the country to lobby MPs for help.
Other leaders of the mortgage broking sector are also crying foul about corporate due process.
Mortgage Choice chief executive Susan Mitchell has called on Treasurer Josh Frydenberg to initiate consultation, noting the financial advice industry had had years of discussions before the Future of Financial Advice changes were introduced.
The Hayne recommendations “will result in poor consumer outcomes, which is not in line with the original intentions of the banking royal commission”, she said on Friday.
Banks currently pay mortgage brokers more than $1.5 billion a year in upfront, and about $1 billion in trailing, commissions but royal commissioner Kenneth Hayne recommended the model should shift to one where the customer pays. On the day the final report was released, the government said it would legislate to ban trailing commissions by mid-2020.
Aussie Home Loans, with more than 1000 brokers in 220 branches, is mobilising its brokers to lobby local MPs to their cause. “We have our brokers around the country liaising with local members, making sure they are as educated and informed as we can be,” Mr Symond said.
Mr Symond, the nephew of Aussie co-founder John Symond, told The Australian Financial Review that taking away almost half the income of anyone “is going to have a material impact”.
“The average mortgage broker earns around $85,000 a year,” he said. “If you take away the trail fee, purportedly around half the earnings a broker would earn on the loan, that means the average broker will earn $40,000 to $45,000 a year. Human nature says they will choose another business or career.”
Shifting to a customer-paid fee would inflict even more damage, because most customers would not pay a fee big enough to keep the industry sustainable.
“Any second-tier lender currently playing strongly in the mortgage world will be disrupted,” he said, arguing local challenger banks such as Macquarie, foreign banks like HSBC, or diversified financial services groups such as Suncorp relied on mortgage brokers for distribution, especially outside the major cities.
He said it was entirely appropriate that banks paid brokers, given brokers were acting in place of expensive branch networks.
“The banks are paying to use the costs of my distribution channel, rather than use theirs. They can close down their branches and use Aussie’s distribution channel, for example,” he said. “The cost should go to the bank because the banks are saving the money.”
Mr Symond’s comments followed a week where lenders ANZ, Macquarie and AMP provided public support for the role of mortgage brokers in facilitating competition, while acknowledging there would be major changes to the economics of the industry.
“Brokers provide a great service. Customers have voted with their feet and said it’s a service they like. They get great value from it, it’s pro competition,” ANZ chief executive Shayne Elliott said 2GB on Monday night. “I think the change will come, but there is still a really powerful role for brokers in this market.”
Macquarie Group chief executive Shemara Wikramanayake said after releasing interim results on Wednesday: “The way [mortgage brokers] are remunerated may have to change, how they engage with their customers may have to change, but I think the service they provide seems to be valuable to customers, so ultimately will have to persist.”
AMP chief Francesco De Ferrari said: “We have to be mindful that the Australian market is very concentrated in terms of financial services and that distribution does provide a very useful driver of competition for the smaller players.”
If removing commissions ended mortgage broking, AMP would have to adapt, he added. “And we will need to build our own direct channel. That would definitely mean leveraging them through our existing distribution networks.”
Disagreement with CBA
Commonwealth Bank, which owns Aussie but is looking to sell down as part of a broader demerger, ironically provided the evidence on which the royal commission relied to find broker loans were riskier. While Mr Symond did not doubt the analysis of his corporate owner, he said: “I also have no doubt, and know for a fact, that other big-four banks do not share that view, and in fact have an opposing view.
“There is no evidence from any customer that there is any systemic issue, of customers getting the wrong loan, the wrong deal, or the wrong service.”
In any event, if CBA had problems with the quality of loans coming from brokers, it was the bank that was responsible, given banks, not brokers, approved loans, he said.
Asked what might have motivated CBA chief executive Matt Comyn to advocate so hard for the customer-pays model, Mr Symond said it was not appropriate to say too much about his parent company, other than uncle “John and I are diametrically opposed”.
“Everyone speaks in their own self-interest, including the big banks. They have a view and I respect it. But I also have a view and they will respect that,” he said.
The royal commission process “didn’t let the mortgage broking industry stand up and be counted and explain the values they provide”, he said.
Asked about the misconduct exposed by the royal commission that occurred at Aussie Home Loans, Mr Symond said the inquiry had “clarified” just six or seven cases at Aussie out of a quarter of a million customers.
“There’s no doubt every industry and sector will have their bad apples, including government. They all do. They got some people in the stand – including some of my people,” he said.
“They clarified six or seven cases in my business out of a quarter of a million customers in the same period of time.
“There was no smoking gun, there was no systemic issue with mortgage brokers, There was no consultation with us. There was no talking things through, or explaining. It was just a one-way street. That’s what a royal commission is all about. It’s about the negative of an industry, not the positives. I get that, but it was very dark.”
He hoped these arguments were being processed by the political parties. “You can smell in the last week or so both Liberal and Labor have become a lot more moderate in conversation. Labor is understanding there are three sides to any story and want to make sure the customer is in the clear and looked after,” he said.
Mr Symond said banks should have to commit to passing any fee savings on to customers but suspects they will keep them to enhance their bottom lines. “Banks don’t have a reputation for passing anything on to customers and I don’t see how tomorrow will become a brand new day in their thinking, and that they will start to do that,” he said.
Almost a fortnight after the royal commission’s report, Mr Symond said it was too early to have modelled the full impact of the loss of trailing commissions on Aussie’s network but he admitted its valuation had been hit.