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Australia’s regional banks have urged the financial services royal commission to consider the potential “significant negative implications” that changes to broker remuneration may have on competition.
In a joint submission in response to the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, AMP, Bendigo and Adelaide Bank, Bank of Queensland (BOQ), ME, MyState and Suncorp highlighted the pro-competitive contribution of the broking industry, and cautioned against changes that would skew the banking landscape in favour of the major banks.
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The regional banks said that “in determining possible reforms to mortgage broking remuneration”, the royal commission should “put considerable weight on the potentially significant negative implications for competition and consumer choice implications”.
The non-majors also called on the commission to take into consideration the “extensive efforts” by the Combined Industry Forum (CIF) to reform the broking industry.
Customers prefer brokers
The regional banks also pointed to research from Ernst & Young (EY) in 2015, in which surveyed customers said that brokers were “better at achieving outcomes such as matching a product to their needs and providing a stress-free arrangement process”.
The regional banks added that in addition to supporting the customer directly, brokers also “deliver better outcomes to all customers, irrespective of whether they use a broker, by increasing competition between lenders”.
“Brokers make it easier for smaller banks to access customers in geographic regions where they do not have a direct branch presence,” the banks submitted.
“This is a significant issue for smaller banks, given the upfront costs and scale requirements needed to operate a fully national branch network.”
The non-majors also said that by being able to consider a broader range of products, brokers present more options to a customer, allowing them to “make a more informed choice”.
“Brokers are doing much of the heavy lifting needed to allow customers to consider lenders beyond the major banks, particularly in regions where smaller lenders have little or no physical presence,” the banks said.
Further, the regional banks noted the contribution made by brokers in “securing a lower interest rate for clients”.
In a separate submission, Macquarie Bank echoed the regional banks’ sentiment, stating that brokers were pivotal in reducing interest rates in the overall market and fostering competition.
“In the 1990s, Macquarie introduced mortgage securitisation to the Australian market,” the bank said.
“This enabled non-bank participants to compete in the mortgage market. That competition ultimately resulted in a 2.50 per cent reduction in interest rate spreads paid by consumers.
“This could not have occurred without the mortgage broker distribution channel. Brokers and other intermediaries are particularly important to lenders, like Macquarie, that do not have an extensive branch network.”
Regional banks on remuneration reform
Despite urging the commission to consider the impact of changes to broker remuneration, the regional banks said that conflicts of interest associated with linkage between commissions and loan sizes “cannot be denied”, but they added that concerns “may be overstated”.
The banks noted that responsible lending obligations under the National Consumer Credit Protection Act (NCCP) guard against the issuance of “unnecessarily large loans”.
The regional banks said that they are “open to investigating options” to remove perceived conflicts of interest, but they said that any changes should:
- support the ongoing viability of the broker model;
- meet a clear cost/benefit assessment, i.e. that the benefits of the change clearly outweigh the costs; and
- be consistently applied across all participants.
[Related: Major aggregator dismisses ‘surprising’ RC questions]
