Leading brokers urge peers to take action

While both the Coalition government and Labor Party have said that they would look to bring in a best interests duty for brokers, ban volume-based commissions and seek to limit clawback to two years (and ban it from being passed on to the consumer) should they be elected this week, the two major players in the upcoming election differ on their stance on broker remuneration.

The Coalition government has said that it would not change broker remuneration in the immediate future but instead review the impact of the best interests duty on the market and broker remuneration in three years’ time.

Meanwhile, the Australian Labor Party would look to ban trail commissions for new loans from 1 July 2020 and introduce a cap on commissions at 1.1 per cent.

Newspoll currently shows that Labor would win the election (should the election be held today).

‘The biggest week in broker history’

Speaking to The Adviser, the founder and director of the Australian Lending & Investment Centre (ALIC), Mark Davis, said that while aggregators and associations had been working to get the broker message out to the public, the customer voice was “still not strong enough to influence both sides of politics to take note and listen”.

Mr Davis said: “This week will be the biggest week for investors and brokers in our entire history.

“All brokers need to be united over these last few days and gather as much support as humanly possible from family, friends and customers by sharing the Choice Matters link and gathering huge support by asking them to e-mail their local MPs on the Broker Behind You campaign.

“Secondly, all brokers need to rally their local MP’s this week as the more support our industry can obtain pre-election, the more chance we have to protect our businesses – and most importantly – vote for the political party who is standing behind the mortgage broking industry.”

According to the ALIC director, the messages needed to be heard ramping up to, and following, the federal election as he did not believe that there had been a united fight against the abolition of trail since the Coalition government had pulled back from their stance on removing trail for new loans.

Mr Davis said that he was calling on the entire broking industry to “unite this week and ensure the industry message is unified and loud: banning trail will decimate the industry”. 

The Victoria-based broker stated that as upfronts have moved to be paid on drawdown net of offset, this has resulted in commissions dropping by approximately 12 per cent.

According Mr Davis, given that the average cost to process a loan had also increased by 35 per cent due to “bank red tape”, brokers were therefore already 47 per cent “out of pocket” when compared to last year.

He warned that any further impact to remuneration could cost up to another 15-20 per cent in revenue.

“The cancellation of trail on top of this could potentially turn this number to 67 per cent, making it extremely hard to offer our current service models,” he said.

“Given that current broker businesses are struggling, any future changes to remuneration will make it unsustainable for many brokers to continue.”

Mr Davis concluded: “Our businesses that we have worked so hard for over the last two decades are worth a much smaller percentage now than when compared to prior to the royal commission, and further changes will deplete these values even more.”

The ALIC broker noted that any potential cancellation of negative gearing on secondhand properties could be “catastrophic for our clients’ net wealth, house values and, in turn, loan volumes”.

“If negative gearing goes and we get the double whammy, further reductions in house values will reduce lending flows significantly. This will make it even tougher to survive the next three to four years under our current broker models before supply issues are formed and house prices go back up.

“Customers want brokers and want services that the main banks can’t deliver on,” he said.

‘Our ability to operate as we currently do will not be possible’

Likewise, Sydney-based elite broker Jeremy Fisher backed Mr Davis’ message, telling The Adviser: “Mark and I have been in the industry for a long time and have well-established businesses. However, this doesn’t mean we are immune to the impact all brokers will endure if trail is abolished. This will be a negative impact to brokers, lenders and clients Australia-wide.

“Clients want to deal with brokers – simple! Sixty per cent of all loans established in the country are done via mortgage brokers. We run our businesses exceptionally well and continually re-invest back to ensure the service proposition to the client is superior to any lender.

“If how we are remunerated is tampered with, our ability to operate as we currently do will not be possible. We will see brokers exit the industry, there will be a slowdown on new brokers entering the industry, staff levels reduced considerably and smaller lenders will suffer with deal flow (given up to 90 per cent of their new business is derived from brokers).”

He continued: ‘The impact overall will be hardest felt by our customers – they will be limited with choice and many will be forced to deal direct. Regional Australia will also feel the pinch as access to branches in some cases could mean driving over 100 kilometres. Whereas, currently, brokers are servicing regional Australia exceptionally well.”

The director and founder of 1st Street Financial added: “We care about our industry and our fellow brokers and want to ensure we do our part to protect what the likes of Mark Bouris and John Symond created over 20 years ago – choice for customers and competition for the banks.”

Mr Fisher added that momentum should remain after the election, as there will still be time to “influence either side about the unintended consequences of changing the way brokers are remunerated plus the benefits brokers provide to consumers”.

“We will also continue our consultative work with Treasury around the most appropriate remuneration model going forward, which we all agree is the current model,” he said.

‘The current structure is the fairest to all parties’

Meanwhile, over in WA, lead broker and director of Launch Finance, Steve Milligan, has been actively campaigning to educate politicians of the unintended consequences to home owners and the local community should the recent recommendations made by the banking royal commission with regard to broker remuneration be implemented.

Following the release of the royal commission report, Mr Milligan met with the current Liberal member for Canning, Andrew Hastie, to discuss trail income and why it is in the best interests of home owners and recently spoke with the running member for Labor, Melissa Teede, about the implications too.

He has now issued a warning that home owners could end up paying more for their mortgage should broker remuneration change.

Mr Milligan said: “In the past, finance brokers only got paid an upfront commission, but the lenders chose to defer some of this upfront payment over the life of the loan (called trail income) because clients were selling houses, refinancing, and the lenders weren’t making the required profit margin out of the broker segment because brokers were also driving lower interest rates.

“It was either increase interest rates to borrowers or change the payment structure to an upfront and trail income. By going back to upfront income only, borrowers will be paying higher interest rates for banks to recoup their profit margins.”

He continued: “The industry has undergone extensive reviews into its remuneration model and, in the absence of any evidence to the contrary, the current structure is the fairest to all parties, including the borrower, finance broker and lender.

“Borrowers benefit from finance brokers driving competition within the lending market and receiving expert professional service that results in positive outcomes for home owners. The key purpose of trail income is to defer a portion of the broker’s income to encourage ongoing service to borrowers.”

The issue of broker remuneration and the viability of the broker channel has also been the trigger for two mortgage brokers to run for the parliamentary seat of Burt in WA.

Westate Finance broker David Goode is running as a candidate for the south-eastern Perth electorate of Burt in the upcoming federal election.

Mr Goode, who is representing the Liberal Party, is contesting the seat against fellow broker and Western Australia Party candidate Sarcha Sagisaka.

Like Ms Sagisaka, Mr Goode is actively opposing changes to broker remuneration as part of his campaign and has endorsed his party’s proposal to retain the status quo.

“I am firmly in favour of leaving the existing system for commissions as it is,” he told The Adviser.

“Our industry bodies such as the MFAA and the FBAA are doing a brilliant job in representing brokers across Australia, and I will continue to support them.”

[Related: Mixed response to new First Home Loan Deposit Scheme]