James Eyers| Australian Financial Review| 6 February 2019
Reserve Bank governor Philip Lowe has backed Treasurer Josh Frydenberg’s cautious approach towards the royal commission’s call for bank-paid mortgage broker commissions to be replaced with customer-paid fees, saying the impact on competition required consideration.
Commonwealth Bank chief executive Matt Comyn also engaged in the most politically contentious issue from the royal commission’s final report, backing the role mortgage brokers played to ensure a competitive market, and suggesting any new regulation should also require banks to charge customers an equivalent fee “so as to not create an uneven playing field”.
After listed mortgage brokers groups saw their share prices savaged following the royal commission’s final report, the broking industry will kick off a national advertising campaign on Thursday arguing the move will drive customers to the largest banks and consolidate their market power.
After revealing a half-year profit of $4.7 billion on Wednesday, Mr Comyn declined to respond to arguments being made by broker groups that CBA’s profits would ultimately rise under a customer-paid model.
But the CBA chief said that in the Netherlands, which has also shifted to a customer-paid model, most brokers have remained in the industry because banks were forced to levy the same fee to maintain “channel neutrality”. He backed this model for Australia.
“I think it is really important that the broking industry is certainly not disadvantaged,” Mr Comyn said.
Dr Lowe said he strongly agreed that mortgage brokers should operate under a best interest duty, another recommendation of the royal commission, and given they “essentially are providers of financial advice” they should operate under the same regulatory regime.
“However, payment for the broker’s work is a more complicated issue,” Dr Lowe said.
The government said on Monday it would ban trailing commissions from next year but decide in three years whether to shift to the customer-paid model due to concerns about the impact on competition.
Its approach contrasts with Labor, which said it would adopt Hayne’s recommendations in full, including abandoning upfront commissions.
‘Government right to be cautious’
Dr Lowe urged a careful assessment of the model and its impact on competition.
“In principle, I agree with trailing commission being banned and payments being upfront,” he said. “I think the government is right to be cautious about going the full way and making the borrower pay.
“The Productivity Commission has written extensively about this. There are legitimate competition issues,” he told a National Press Club lunch in Sydney.
But in a detailed analysis in his final report, Commissioner Hayne suggested a move away from conflicted commissions need not compromise competition.
He acknowledged arguments that abolishing trail commissions would adversely affect the profitability and viability of brokerage businesses, diminishing competitive pressures in the market.
But he said such arguments assume borrowers won’t see the advantage in using a broker with transparent remuneration arrangements.
He said this was preferable to the current conflicted commissions which “can reasonably be expected to influence the broker’s recommendations about choice of lender, amount to be borrowed, and terms on which the amount is borrowed. And the influence is in favour of the party paying the commission – that is, the lender.”
The Dutch model
How the fee is fixed is best left to the market to determine, the final report argued, and this could be a fixed amount, a stepped fee, a value-based fee or some combination.
“If borrowers pay a transparent price for the service provided to them then the market will determine that price based on the value of the service to borrowers,” the commissioner said.
He added the cost of using the brokerage service could be capitalised in the loan and repaid over the life of the loan – and would represent a tiny amount of the loan.
His final report also pointed to findings by the Australian Securities and Investments Commission that remuneration and ownership structures have inhibited the consumer and competition benefits achieved by brokers.
The royal commission also favours the Netherlands’ model, endorsed by Mr Comyn on Wednesday, requiring banks to also charge a fee when directly originating a loan.
Yet political lobbying is rising over the issue. The Mortgage & Finance Association of Australia – on behalf of 15 aggregators, brokers and smaller lenders including Connective, AFG, Aussie, Mortgage Choice, Pepper Money and Finsure – will begin a national print, TV, radio, digital and outdoor advertising campaign on Thursday.
‘I can see the challenges for brokers’
The print ad argues: “The last thing Australia needs is policy change that further entrenches power amongst the few lenders with large branch networks.”
AFG – whose share fell by 30 per cent on Tuesday – said it was disappointed by the royal commission’s emphasis on Mr Comyn’s testimony in favour of the model during the hearings in November, arguing “the major bank’s positioning was clearly self-serving and designed to win market share from the smaller banks”.
Mr Comyn said on Wednesday: “I do think the competitive nature will be carefully considered” by policy makers, and the ultimate impact is uncertain.
“In the Netherlands, there wasn’t a reduction in the capacity or number of mortgage brokers even with a shift [to customer pays], and they were the same sort of recommendations the commissioner has put forward,” he said.
“Some brokers have been kind enough to share their views directly with me – and I can understand those recommendations don’t necessarily align with everyone’s views. But as I have said, I do think they are the appropriate recommendations.
“I can see the challenges for brokers, but ultimately, I think they deliver better customer outcomes over the long term.”