The royal commission into the banking sector recommendations' didn't hit only banks but also brokerage firms. From next year, banks will be forbidden from paying mortgage brokers what so-called “trail commissions” which was described scornfully by Commissioner Kenneth Hayne QC as “money for nothing”.
To shed the light on this issue we asked Nancy Youssef, Financial broker about her insights in this regard. It is worthy to mention that Nancy was generous and provided us with an Audio interview in Arabic and the following Q&A interview in English.
Q1 How will this ban impact the brokerage industry in Australia?
Yousef: To say that trail is “money for nothing” has really demonstrated that there is a lack of understanding of what it is that brokers do for their clients and the value that we bring to their everyday lives as they work to achieve their property ownership goals. Trail commissions are the underlying backbone of every mortgage broking business. The impact will be felt in many ways.
Trail was introduced in exchange for a reduced upfront payment, and it is what keeps brokers operating and able to work to provide our clients with the services they need – at no cost to them. Trail pays for us to provide our clients with annual mortgage reviews, arranging top ups to existing loans and negotiating with the banks for things like rate decreases, changes to your loan structure, issues with accounts etc.
When trail is removed, brokers will have no choice but to charge their clients for these services moving forward. It’s either that or work for free. The removal of trail will also see a lot of brokerages unable to cover their overheads of rent, staff, superannuation, insurances, industry fees etc and it’s these business that will close down.
To be clear - there are over 35,000 people who will be at risk of losing their jobs or their business with this decision. The impact of this is not only higher unemployment and a strain on welfare, but also consumers will suffer as it will become harder for them to access advocate who will work to find them the best lending solution.
A more widespread impact is that, with the number of mortgage brokers reducing, the businesses who provide services to the broking sector and smaller, non-bank lenders are also going to have their businesses impacted severely.
These smaller lenders are so important to keep competition alive and prevent an oligopoly by the Big 4. These lenders rely almost 100% on the broker channel for business as they don’t have branches or mobile lenders – this allows them to keep their rates low, applying pressure to the Big 4 to do the same. With less brokers bringing this business in, there is a real risk that these lenders will also need to close their doors.
Q2: What is the importance of your role for new home buyers?
Yousef: First home buyers are especially vulnerable in the mortgage marketplace as they often have little knowledge about the different options available to them or the various policies that might exclude them from obtaining finance from, say, a Big 4 bank.
Too often we see people who have been declined finance at several lenders before coming to see us because they didn’t understand the process or policies. It’s these clients that we do the most work for upfront – we educate, we research, we hold their hand every step of the way.
We work with them on budgeting and savings plans – sometimes for months or years (without charge) before they are ready to commit to a mortgage. We help them to find the other services they need like solicitors, conveyancers, accountants that they otherwise may have no idea about. In short, we are their best advocate in what is arguably one of the most important steps in someone’s life and potentially the largest purchase they will ever make. The vast majority of brokers are working for their clients because they are so passionate about helping people realise their dreams.
Q3: How realistic and operational are these recommendations?
Yousef: Realistically, these recommendations have devastated the broking industry. Brokers that have spent decades building their client base have had their business’ value and probably 70% of their income potentially wiped out overnight if the proposed changes to upfront commission are also implemented..
Realistically, a fee for service model is not a viable option for most Australians. Surveys have shown that, although consumers value the role of the broker very highly, most would be either unwilling or unable to pay for that service themselves.
Allowing the fee to be added on to the loan amount is a terrible solution as that few thousand dollars is then subject to interest over 30 years, making it a very expensive option indeed.
Operationally, we are already subject to heavy compliance controls from ASIC. All commissions and trail are disclosed to our clients upfront and with transparency.
Commission rates paid by lenders are very similar across the board so the incentive to offer a client a bad loan for a higher pay day is virtually non-existent. Brokers are going to have to break down the value of the services they provide, work out what their fee per hour is and start to offer a “menu” of additional services with their associated costs.
The burden of which will be borne by the clients having to pay for these services that were previously covered by trail payments.
Realistically, mortgage brokers are far worse off under these recommendations - and consumers are going to be worse off under these recommendations. The only winners here are the larger banks, as they now have less competition.
