Borrower-pay model for mortgage brokers will give free kick to big banks

February 6th, 2019

Competition in the home lending sector has never been more at risk following the recommended changes to broker remuneration in Kenneth Hayne’s Royal Commission final report released yesterday.

The report recommends a move to a borrower pays remuneration structure for mortgage brokers which would leave customers worse off, according to Connective, Australia’s largest mortgage broking aggregator.

Mark Haron, Connective Director, said the recommendations to change how mortgage brokers are paid will limit access to brokers, and therefore will take away choice for millions of Australians, according to Connective.

“Choice matters for Australian home buyers and it has to be protected; choice fuels competition and competition should keep all the players honest and accountable. Removing access to choice and competition in the home lending sector is simply handing more power back to the major banks, which is exactly what Australians don’t need,” said Mark Haron, Connective Director.

Connective unequivocally reject calls to change the way mortgage brokers are remunerated to a borrower pays model, while unequivocally supporting the need to challenge the industry to strive for better outcomes for consumers.

“The model for how mortgage brokers are paid is not fundamentally broken. There is always room for improvement but broker remuneration has been scrutinised in multiple reviews over recent years, with none of these studies finding systemic misconduct and none advocating substantial reform,” Mark said.

Mortgage brokers provide choice of lenders that many Australians could not access without a broker. Net interest margins for banks have fallen by over three percentage points over the past 30 years with greater competition generated by mortgage brokers a key contributor.

“Changing how mortgage brokers are paid will do more to reduce competition, than it will to address any misconduct. The Royal Commission was set-up to address misconduct, not to tamper with competition,” he said.

Connective believes that ensuring good outcomes for customers goes beyond focusing just on the remuneration model for mortgage brokers; there is an obligation for brokers to always put the customer first.

“Examining the culture and conduct of the entire financial services sector was the right thing to do. However, we also think it’s critical to acknowledge the work already done to improve customer outcomes in the mortgage broking sector,” said Mark.

Connective has been working with the Combined Industry Forum (CIF), which was established in response to 2017 ASIC review, to progress meaningful reform including the development and implementation of a ‘Customer First Duty’.

“We’ve always supported a movement towards a ‘customer first’ duty and therefore fundamentally support Hayne’s recommendations for a Best Interest Duty. The devil is in the detail however and we are particularly interested to see how the Best Interest Duty will extend to all lenders, including the banks. Improving customer outcomes requires a level playing field.

“Rather than recommending sweeping change for the sake of change in every sector of financial services, we believe the existing laws and CIF’s reforms should be given a chance to have an impact.

“The unintended consequences of Hayne’s recommendations in relation to the mortgage broking industry is reducing competition and handing yet another free kick to the big banks. Competition needs to be fiercely protected now more than ever, reducing choice is not the answer,” Mark concluded.