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The federal government’s proposed best interests duty could undermine the market power of the major banks, according to one analyst.
According to UBS analyst Jonathan Mott, the Morrison government’s newly proposed National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019 – which contains a new best interests duty obligation on mortgage brokers – could threaten the major banks’ market power by increasing “churn” in the home lending space.
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Mr Mott pointed to provisions outlined in the draft bill, which propose that during an annual review of a client’s home loan, a broker does not “suggest that the customer remain in a credit contract without considering whether this would be in the customer’s best interest”.
The UBS analyst said that such a provision could become a common industry practice, which, in turn, could lead to a rise in borrower switching.
“[The proposed provision] suggests that a mortgage broker annual review may become best practice across the industry, and would also help justify any trail commission,” he said.
“If this becomes the case, and the mortgage broker must consider whether remaining in the current credit contact is in the customer’s best interest, the churn rates and increased discounts are highly likely to accelerate.”
In his analysis – which involved a study of data from the Australian Prudential Regulation Authority (APRA) and the major banks – Mr Mott found that mortgage origination via the big four’s proprietary networks has fallen from a peak of 48.3 per cent in 1H13 to 37 per cent as at the close of 1H19.
Over the same period, the major banks’ share of the broker market increased from 30.6 per cent to 34.5 per cent over the same period.
As a result of the shift in channel origination, the major banks’ share of new home loans has dropped from 78 per cent in 1H13 to 71.4 per cent.
Mr Mott said that the banks’ dwindling share of mortgage origination via their branch networks would ultimately have implications on their underlying financial position.
The UBS analyst said that increased exposure to the broker channel would offset any cost-savings measures employed internally, particularly if loan switching increases in response to the best interests duty.
“While the majors may attempt to stabilise [net interest margins] and [return on equity] by not fully passing through further RBA rate cuts to variable rate customers, this NIM benefit will likely be quickly eroded as mortgage brokers find cheaper loans for their customers,” he said.
“The proposed introduction of the best interests duty for mortgage brokers will likely accelerate front-book/back-book churn, especially if annual reviews become best practice for mortgage brokers.”
Mr Mott said he expects the decline in branch-originated home loans to prompt the majors to reduce their proprietary network to cut costs, which would, in turn, further increase their exposure to third-party originators.
“Sales per branch are likely to continue to fall, putting pressure on the banks to further rationalise their distribution,” he said. “This may become a self-fulfilling loop.”
Mr Mott questioned whether banks would evolve into exclusive mortgage underwriters if such trend continues in the long term.
“If these trends are not addressed, could banks eventually become mortgage underwriters rather than distributors?” he stated.
The UBS research follows the release of APRA’s latest monthly authorised deposit-taking institutions statistics, which revealed that three of the big four banks reported mortgage book contractions in July, compared to only one of the five largest non-major lenders.
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