I write to you as one of Australia’s 17,000 mortgage brokers to ask you not to hand power back to the big banks by killing competition in the home lending market.
As you will be aware, potential reforms are currently being discussed which include a ban on broker commissions and the introduction of a customer fee-for-service. If enacted, this could make the mortgage broker channel unsustainable, forcing customers back to the big banks with large branch networks.
Taking choice away from customers by killing competition in the home lending market is likely to result in:
Increased fees and interest rates for customers – as banks seek to restore their declining interest margins and increase profit without intense competition to keep prices down
Diminishing availability of credit – especially for customers in regional and rural Australia, where few branches remain, and for lower income customers with more complex credit needs such as first home buyers
The end of trade for up to 17,000 small businesses, and the resultant loss of up to 27,000 FTE jobs in Australia
Mortgage brokers are critical to competition in the home lending market in Australia.
Mortgage brokers originate almost 60 percent of all Australian home loans, and act as a shop front for lenders of all sizes, particularly those without large branch networks including credit unions, regional banks, international banks, non-major banks, building societies, mutuals and non-bank lenders. The competition that brokers have brought to the market has contributed to a fall in net interest margin of more than three percentage points,* which delivers lower interest rates to all Australian homeowners, and interest savings of more than $300,000 on a $500,000 thirty-year home loan.
The important competitive impact brokers have delivered has been acknowledged in recent reviews of the mortgage broking industry by ASIC, the Productivity Commission and the Australian Banking Association (ABA). Treasury also noted in its submission to the Royal Commission Interim Report, that:
“If mortgage broking activity diminishes, this could have a significant detrimental impact on competition in the mortgage market. The potential beneficiaries of any lessening of competition would be the major banks with established branch networks”.
The mortgage broking industry is well aware of the need to continuously improve its practices and to ensure that customer outcomes remain overwhelmingly positive. To that end, following the 2017 ASIC Review of Mortgage Broker Remuneration, the industry came together to implement all the recommendations from this review. Through the Combined Industry Forum (CIF), the industry is addressing conflicted remuneration, improving disclosure and reporting, introducing a holistic approach to industry governance, strengthening its obligations to customers and introducing an enforceable, compulsory industry code. The CIF’s reform agenda is progressing well, and has the strong support of both ASIC and Treasury.
The industry is committed to the CIF reform agenda even though the two most recent, comprehensive reviews of the industry (ASIC’s Report 516 and the ABA’s ‘Sedgwick’ Review) made no findings of systemic harm. It is committed to this reform agenda despite the exceptionally strong industry data which shows:
Increasing consumer support and high satisfaction
Extremely low and falling complaints
Low customer arrears
Increasing competition driven by brokers, particularly for regional and smaller lenders
But most importantly, it is committed to this reform agenda because it will strengthen customer outcomes without destroying the industry and handing power back to the big banks.
Despite these reforms, and the strong support given to them from both ASIC and Treasury, serious consideration at the parliamentary level is still being given to a blanket ban on broker commissions paid by lenders. Treasury is highly critical of such an approach, saying in its submission to the Royal Commission Interim Report:
“While appealing in its simplicity, blanket bans are not the right answer, even if there is a case for banning or modifying certain forms of remuneration. Not all intermediaries are the same; there are differences between financial advisers and other financial product brokers, and between different product markets, that need to be considered. Any loss of competition or efficiency would ultimately have negative consequences for consumers and the community. The likely benefits of change should exceed the inevitable costs and disruption.”
Of equal concern is the proposal to replace mortgage broker commissions with a FoFA-style customer fee-for-service of thousands of dollars; and the alternative proposal (the Netherlands model) to introduce a customer fee-for-service for all home lending customers whether they access a bank branch or a broker.
These options – unsurprisingly – have the strong support of the Commonwealth Bank (CBA), which used its testimony at the Royal Commission hearings to push for these policy changes. This reflects the desire of some of the big banks to push customers back into the branches to increase their own profits.
A FoFA-style customer fee-for-service would see customers forced to pay thousands of dollars to access a broker, while accessing a bank branch would remain free. Independent research released in January 2019 in a survey of almost 5,800 Australian broker and bank customers has revealed that 58 per cent of Australian consumers who intend to use a mortgage broker in future would be unwilling to pay a broker fee of any nature and only 3.5 per cent of consumers would be willing to pay a fee of $2,000 or more.^
Such a consumer fee-for-service would result in customers deserting the broker channel, and the regional banks, credit unions and many other lenders they support.
It is therefore not surprising that Credit Suisse has estimated that the banks will save between $800 million and $1.6 billion from these potential broker remuneration changes.# And without competitive pressure, it is highly unlikely that these savings will be passed through to the customer.
The alternative proposal (the Netherlands model) not only has the customer paying a new fee of thousands of dollars every time they access a broker, but also every time a customer walks into a bank branch to arrange a home loan. This is nothing more than a massive new tax on borrowing.
Of equal concern, this proposal ignores elements of the Netherlands tax system that are critical to its operation. A key aspect of this model relates to a customer’s ability to pay the fee. In the Netherlands, all interest on a home loan and costs relating to establishing a home loan are tax deductible, including the acquisition of advice relating to the loan. These can be deducted over the life of the loan.
Such massive changes to the tax deductibility of interest paid and expenses, of course, would never happen here, and as such the full weight of the new multi-thousand dollar fee would be felt by every home loan customer, only adding to the current affordability crisis for those already struggling to buy a home.
Another critical aspect of the Netherlands model that has been ignored is the ability for the banks to undercut the broker channel. As such, the only way this could work is if fees were of comparable size and not of a level that challenges viability for broker businesses.
However, the current proposal states that this fee should be the equivalent of the banks’ cost of writing a home loan. In this case, the large lenders’ enormous economies of scale will mean their costs will be a lot lower than the marginal cost for a broker to arrange a suitable loan for a customer, which will therefore necessarily undercut the broker channel. Again, this brings great risk that consumers simply desert the broker channel, decimating competition and access to credit.
While the major lenders will be very happy about these proposals, we fail to see how this is a good outcome for everyday Australians.
I again ask you as a Member of the Federal Parliament to reject the blanket ban on broker commissions; reject a FoFA style customer fee-for-service for mortgage brokers; and reject the alternative of a Netherlands style tax on borrowing.
These changes would decimate the broker channel, cut customer access to smaller and non-bank lenders, and entrench bank power by forcing customers back into the branches. The destruction of competition will in turn limit customer choice and further limit access to credit – particularly for those with low income, complex credit or those in rural and regional areas.
The industry has acknowledged that there are issues that require solutions, and it is progressing strongly on reform.
I urge you to get the facts at
www.brokerbehindyou.com.au and consider the unintended consequences of a blanket ban on broker commissions – for the good of all Australians.