Protecting choice for Australians

Protecting Choice
for Australians

Connective’s response to the Final Report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

By now, you’ve no doubt seen the Royal Commission has published its final recommendations. It’s fair to say the mortgage broking industry has been heavily scrutinised and significant change has been recommended.

These proposed changes will diminish choice for Australian home buyers and will put more power in the hands of the major banks. This is not what Connective – or any Australian – wants to see come out of the royal commission.

It’s time to set the record straight on a few things. These are the facts:

  • The royal commission has recommended a move to a borrower-pays remuneration structure for mortgage brokers and the removal of trail commissions.
  • This will mean Australians will have to pay an up-front fee to access a mortgage broker’s service. The reality is 96 per cent of Australians who currently use, or intend to use, a broker would not be willing to pay an upfront fee. Adding fees upfront only increases pressure on housing affordability[1].
  • Mortgage brokers provide additional choice for consumers and add competition to the market, giving consumers options they could otherwise not access alone. In fact, Mortgage brokers have 34 lenders on their panel and use 10 on average, and provide distribution for small lenders equivalent to 118 branches[2].

  • Choice in the market has also put downward pressure on interest rates. Broker-driven competition has contributed to a fall in net interest margins of more than three percentage points over the last 30 years[3]. This is equivalent to savings of more than $300,000 on a $500,000 thirty-year loan[4]. Greater pressure on interest rates is a positive outcome for all consumers, regardless of whether they use a broker or go direct to their lender of choice.
  • Australians need ongoing support to ensure their home loan products remain competitive. Over time, having access to a mortgage broker who provides this support, without having to spend more money, is a win-win for customers and brokers. Trail commissions are often misunderstood – they are simply a deferred payment for this support and not a fee for no service.

[1] Momentum Intelligence, The Consumer Access to Mortgages Report, February 2019. [2] Deloitte Access Economics, The Value of Mortgage Broking, July 2018. [3] Deloitte Access Economics, The Value of Mortgage Broking, July 2018. [4] Based on an interest rate fall from 7% to 4% per annum

What can you do?

Presenting a united front to fight against these recommendations will be extremely powerful. We encourage you to support mortgage brokers by getting involved in industry campaigns. This will help send a message to policy makers to protect choice for all Australians and avoid giving the big banks a free kick.

#ChoiceMatters Pledge Your Broker Behind You Change.org petition

Do you need support? NAB’s Employee Assistance Program is available to you

There has been some uncertainty in the market following the release of the Royal Commission Final Report and we are pleased to let you know that, as a Connective broker, NAB’s Employee Assistance Program is available to you at any time on 1300 360 364.

This service funds short-term counselling services (generally a maximum of three sessions) dependent on the needs of the individual. Appointments may be face-to-face or over the phone and can be made in advance by contacting the service on 1300 360 364.

This service is offered by Benestar. If you contact them please ensure you let them know that you are a NAB accredited broker.

Do you need support?

Frequently Asked Questions

Click on a topic below to find out more

Broker Remuneration

How will Connective fight the Royal Commission’s recommendations regarding an industry-wide change to a borrower-pays system for mortgage broking services?

  • Connective rejects any recommendation to change the way mortgage brokers are remunerated beyond the recent Combined Industry Forum (CIF) reforms. We do not believe the current model requires fundamental changes – any changes are more likely to reduce competition than address potential misconduct.
  • Throughout the Royal Commission, we have advocated for brokers and our industry, speaking out against any changes that may adversely impact choice and competition. We will continue to do this and will also ensure that we make our position very clear.
  • From here we, will continue to advocate on the industry’s behalf and will work closely with our counterparts, small lenders and industry bodies to amplify our message in support of brokers.
  • We have prepared a formal response which we encourage you to share this with your network.
  • We are speaking with media to make our views heard and will be promoting our position across all channels including via social media and in time, direct to policy influencers.
  • We will continue to promote the #CHOICEMATTERS campaign, demonstrating community support for the important role brokers play.
  • We will also continue to align with the MFAA’s advocacy campaigns and ensure that our views are publicly stated so policymakers are aware of these views This includes highlighting the points in ‘The Value of Mortgage Broking’ report developed by Deloitte.

Is it ‘self-serving’ for brokers to fight the Royal Commission’s recommendations to change to a borrower-pays system?

  • The change could limit consumer’s access to the value, service and choice mortgage brokers provide. Fighting these recommendations is in the best interest of consumers and the economy, as well as mortgage brokers.
  • 96% of consumers who have used a broker to secure their mortgage said that they would choose to use a broker again. 63% of consumers who went direct to a lender to secure their mortgage said they would rather use a mortgage broker next time.
  • Broker remuneration has been scrutinised in several reviews over the past two years, with none of these studies finding systemic misconduct and none advocating substantial reform.

How much do mortgage brokers earn, on average?

  • Most mortgage brokers are small business operators. According to Deloitte Access Economics, they earn an average of $86,417 p.a. before tax.
  • Many people are under the false impression mortgage brokers are high-income earners.
  • Mortgage brokers provide high-value services to consumers at no cost to them. Our decision to fight changes to the way they get paid is not only to protect their livelihood, but also to protect the many consumers who need to use their services and are satisfied with the result.
Royal Commission Recommendations

Where can brokers and consumers get more information about what these recommendations mean?

  • Connective has prepared a formal response to the Royal Commission’s Final Report and created resources which include media releases, a curation of the relevant media coverage and fact sheets on the value of a mortgage broker.
  • We will also continue to post on social media and promote messages and updates on our website.
  • Brokers will also continue to receive direct communications and updates via email.

When will the Royal Commission recommendations be final and implemented?

  • It was recommended that changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.
  • It is important to note that it will take months before any recommendations are final. We may not have any firm policy change confirmed until August. This is a positive for us as it gives us an opportunity to make our views heard and to influence the outcome (that is, the detail of any change).
  • With an election looming, there will be a lot of talk about the Royal Commission findings and whether Hayne’s recommendations will be accepted in their current form. Remember, we have a long way to go and the final changes may not look anything like the current recommendations. We will continue to push our message to try and influence the outcome at every stage.

Connective disagrees with the Royal Commission recommendations regarding broker remuneration. What action do we consider to be fair?

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has put Australia’s financial services sector under the microscope and exposed practices and cultures that have seriously diminished trust in our financial sector. The exposure has led to calls for dramatic change.

Connective agrees that shining a light on misconduct is appropriate – however, we also believe many of the recommendations made in the Royal Commission Final Report in relation to the mortgage broking industry are fundamentally flawed. They will do more harm to competition than they will do to address misconduct.

  • Connective unequivocally rejects the recommendations made to change the mortgage broker remuneration model in relation to both borrower-pays model and the removal of trail commissions. There is always room for improvement, but the current model for how mortgage brokers are paid is not fundamentally broken. Changes to the remuneration structure will ultimately remove consumer access to choice and limit competition in the home lending sector by making it less viable for brokers to offer the valuable service they currently provide. This will simply hand more power back to the major banks.
  • We are committed to improving standards in the industry and outcomes for consumers and believe the best way to achieve this is with the reforms proposed by the Combined Industry Forum (CIF). We support CIF’s proposed reforms to remuneration and do not believe any change needs to go beyond these.
  • We know that a broker’s objective is always to put their customer’s interests first but ensuring ‘good customer outcomes’ goes beyond focusing on remuneration.
  • We’ve always supported putting customers first and therefore fundamentally support Hayne’s recommendations for a Best Interest Duty. However, questions remain in relation to what law will apply to the ‘Best Interests Duty’ and how it will extend to all lenders, including the banks. Improving customer outcomes requires a level playing field across all parties in the home lending sector. The current recommendation of applying a Best Interest Duty to brokers but not lenders is inconsistent and potentially ineffective.
  • It’s important to note that ASIC and Treasury conducted the most comprehensive study ever on remuneration for brokers in 2018 and did not identify any systemic misconduct. (Ref. ASIC (2017). Report 516: Review of mortgage broker remuneration. Australian Securities & Investments Commission. Available at: http://asic.gov.au/regulatory-resources/find-a-document/reports/rep-516-review-of-mortgage-broker-remuneration/.)
  • Changing how 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.
What action can you take

How can you join the fight against the recommended changes?

  • Presenting a united front to fight against these recommendations will be extremely powerful. Connective will continue to work with the wider industry on how we can best respond as a united group. There is already a consistent response to the recommendations from many areas of the industry.
  • We invite you to be part of this– by sharing content, speaking with relevant people in your networks and engaging directly with your clients. We will keep you up to date on opportunities to participate in our activities and activities of our industry partners.
  • Our #CHOICEMATTERS campaign has gathered momentum and we encourage you to show your support by pledging if you have not done so already. You can also share this with your networks to ensure the support continues to grow.
  • The MFAA have launched a campaign in support of you and the industry – we are backing this campaign and again invite you to get behind it to further promote the messages. View campaign resources.
  • A Connective broker has set up a change.org petition which has gained huge support. Sign the petition here.

What is the #CHOICEMATTERS campaign aiming to achieve?

  • Connective wants to gather support for the critical role that mortgage brokers play in the lives of Australian borrowers. We are calling on brokers and the community to pledge their support for mortgage brokers to show policy makers just how important value, service and choice are to Australian home buyers.
  • Since the introduction of the mortgage broking channel, the ability for new competitors to access the market via the mortgage brokers has forced large retail lenders to review the pricing of their products in order to compete. This has created downward pressure on the bank’s margins, contributing to a fall in net interest margins by over 3% points over the past 30 years (Ref. Deloitte Access Economics Report, ‘Value of Mortgage Broking’, July 2018). #CHOICEMATTERS supports the important role of mortgage brokers in creating value for borrowers and stimulating vital competition.
  • Research shows that consumers are significantly more satisfied when using mortgage brokers than when going direct to a bank. 96% of consumers who used a mortgage broker were either satisfied for very satisfied (Ref. Momentum Intelligence ‘Consumer Access to Mortgages Report’, Jan 2019). The #CHOICEMATTERS campaign will demonstrate to policy makers the ever-increasing support for mortgage brokers.
  • Additional consumer research provides further evidence of the consumer attitudes to and perceptions of mortgage brokers, such as FBAA’s MyNextAdvice ‘Client sentiment’ survey (FBAA, 2018) of broker customers. This survey found that:
    • On average, satisfaction of (mortgage broking) clients was high with 88% of respondents indicating that the mortgage broker exceeded their expectations
    • 94% were happy with their broker’s knowledge and competency
    • 93% agreed their broker had their client’s interest at heart
    • 1% were satisfied with the strength of the broker-client relationship
  • Competition is healthy. Competition saves Australians’ money and holds businesses to account. Competition in Australia’s home lending market should be fiercely protected, but right now it has never been more at risk. The Connective #CHOICEMATTERS campaign aims to ensure we can protect the vital role that mortgage brokers play in keeping competition alive, delivering value and providing choice for borrowers.

How can we convince consumers to get behind #choicematters?

  • While there is always room for improvement, the current model for how mortgage brokers are paid is not fundamentally broken. Changes to the remuneration structure will ultimately remove consumer’s access to choice and limit competition in the home lending sector by making it less viable for brokers to offer the valuable service they currently provide. This will simply hand more power back to the major banks.
  • Every Australian navigating the waters of purchasing property deserves choice, convenience, and service they can trust. This should be non-negotiable.
  • These proposed changes to how mortgage brokers in Australia are paid will fundamentally reduce value, service and choice. The choice that mortgage brokers provide and the critical role they play in the Australian home loan market is undeniable.
  • Recent data from Momentum Intelligence revealed the overwhelming majority (96.5 per cent) of those who currently use, or intend to use, a broker would not be willing to pay an upfront fee equal to the average upfront commission.
  • What’s more is that 96 per cent of Australians who use brokers said they were satisfied with them compared to just 67 per cent who deal directly with lenders.
Impact on customers

If the proposed remuneration changes are passed into legislation, how will that impact consumers? 

  • There is still uncertainty around what the final recommendations will look like and the potential impact to consumers if the Royal Commission recommendations are adopted. What we do know already is that the Royal Commission recommendations that will negatively impact brokers, will also have a knock-on effect to competition in the home lending market, and this will directly impact the hip pocket of all Australians.
  • Removing the choice that mortgage brokers offer will only put more power in the hands of the big banks and remove or limit access to smaller lenders. More than ever before, Australians should realize that placing more power in the hands of fewer financial institutions means less competition, less choice and will ultimately lead to an outcome that only benefits the big banks.
  • Connective has a full suite of products, services and support systems to help brokers to continue to assist their customers to achieve good outcomes, protect their businesses and help them continue to grow in consideration of any potential changes. This includes, but isn’t limited to, asset finance options, Connective Home Loans, access to Mercury (the industry leading aggregation platform), learning and development activities, a best in class online learning platform, Digital Marketing Hub, Connective Property Tools and compliance support too. We encourage our brokers to access the full extent of the services provided by Connective during this time of change.
The value of mortgage brokers

How can we ensure consumers understand the benefits of brokers?

  • Our #choicematters is designed to deliver the key points to both brokers and consumers.
  • Mortgage brokers bring competition to the mortgage industry by facilitating access to lenders other than the four major banks and their affiliates. This share of mortgage broker originated home loans has increased from 21.4% in 2013 to 59.1% in 2018.
  • Mortgage brokers give more choice to consumers. They provide access to lenders that the average consumer does not have, including access to small and regional lenders beyond the ‘Big banks Four’ which dominate the market.
  • Close to 96% of consumers who have used a broker channel to secure their most mortgage said they’d choose a broker again. Compare this to the 63% of consumers who went through a lender-only channel and said they’d rather use a mortgage broker next time.
  • Increased choice and competition go hand in hand. Competition stimulated by mortgage brokers has led to favourable outcomes for consumers in the form of lower interest rates. In fact, broker-driven competition has contributed to a fall in net interest margins of more than three percentage points over the last 30 years[1]. This is equivalent to savings of more than $300,000 on a $500,000 thirty-year loan[2].
  • More choice for consumers results in greater pressure on interest rates and is a positive outcome for all consumers, regardless of whether they use a broker or go direct to their lender of choice.
  • The choice and that mortgage brokers provide and the critical role they play in the Australian home loan market is undeniable. Consumers choose mortgage brokers because they believe they are most likely to get the best loan for their needs and that they deliver the widest choice of products. (Ref. Deloitte Access Economics Report, ‘Value of Mortgage Broking’, July 2018).
  • Mortgage brokers providing a variable and scalable distribution channel for lenders beyond their branch network, for those that have branches. For many regional or small levers mortgage brokers provide an indispensable distribution channel, providing consumers access to a wider range of choice and consequently, increasing competition which delivers better value to consumers.
  • Brokers also help lenders to diversify their risks away from being too concentrated in a particular part of the housing market. Consequently, all categories of lenders use brokers even if they have well established bricks-and mortar networks.

 

[1] Deloitte Access Economics, The Value of Mortgage Broking, July 2018

[2] Based on an interest rate fall from 7% to 4% per annum

Industry involvement

What is the mortgage broking industry already doing to improve?

  • The mortgage industry is continuously improving the level of service, expertise and professional skillset of brokers, to help them continue to serve customers and their evolving needs, through continuous professional development programs.
  • Brokers earn Continuing Profession Development (CPD) points to update and maintain their professional competence. Earning CPD points is a requirement of the industry regulator ASIC. Connective actively uses our Learning and Development program to train/upskill brokers on the CIF code and continually works to improve customer outcomes.
  • The Combined Industry Forum (CIF), which was established in response to the 2017 ASIC review, has also progressed meaningful reform including the development and implementation of a ‘Customer First Duty’.

What is the industry currently doing to resolve issues around consumer trust?

  • Connective disagrees that there is an issue with consumer trust. 59.1% of Australians choose to use a mortgage broker, rather than go direct to a bank and this figure is growing steadily. Consumers are more satisfied with the mortgage broker channel than the proprietary channel: 96% of consumers are either satisfied or highly satisfied with their mortgage broker compared with only 67% of consumers who deal directly with a lender (Momentum Intelligence ‘Consumer Access to Mortgages Report, January 2019)
  • Almost 80% of consumers have no concerns with the current remuneration structure of mortgage brokers and 93% of consumers agree that their broker had their interests at heart. (Momentum Intelligence ‘Consumer Access to Mortgages Report, January 2019)
  • In saying that, ensuring good outcomes for consumers goes beyond focusing just on the remuneration model for mortgage brokers; brokers always work for the customer and put them first. The industry has already set standards that go above and beyond the existing benchmarks in the responsible leading requirements outlined in the National Consumer Credit Protection Act (NCCP Act).
  • Connective supports the CIF proposed ‘Customer First Duty’ be implemented through the Mortgage Broking Industry Code and framework and will work with brokers to enforce those standards.

Does the industry have anything in place that already addresses the concerns raised by the Royal Commission?

  • The Combined Industry Forum (CIF) reforms have already addressed several issues relating to broker remuneration and the customer experience. These recommendations came out of the 2017 ASIC Review of Mortgage Broker Renumeration Report.
  • There are 6 CIF recommendations in the process of being adopted – and the Royal Commission should allow for more time to see the real impact of those changes before implementing further policy.

What specifically does the CIF recommend?

  • In response to ASIC’s Remuneration Review in 2017, the Combined Industry Forum has been working on a integrating a ‘Customer First Duty’ into the governance framework and the mortgage broking industry code to make it clear to customers that brokers act in the customers’ best.
  • In addition, the CIF has made the following recommendations to minimize the risks in the remuneration structure of residential mortgage lending:
  • Changes to the standard commission model
    • Current remuneration relates to loan size and CIF recommends that remuneration should relate only to the funds drawn down and used by the customer. This removes one of the main conflict risks identified by ASIC when brokers recommend products to consumers
  • Move away from volume-based commissions, campaign-based commissions and volume-based bonus payments
    • The industry ceased such payments at the end of 2017, which has resulted in the reduction of conflict risk in product recommendations.
    • It is important to note the industry has not ‘grandfathered’ any such schemes and there is no intention to introduce new ones.
  • Moving away from soft dollar benefits
    • CIF has already proposed changes to ‘broker club’s’ as well as to conferences/professional development events. These reforms ensure brokers’ education is focused and geared towards better customer outcomes.

What can you do to get involved in industry initiatives

  • Presenting a united front to fight against these recommendations will be extremely powerful. Connective will continue to work with the wider industry on how we can best respond as a united group. There is already a consistent response to the recommendations from many areas of the industry.
  • We invite you to be part of this– by sharing content, speaking with relevant people in your networks and engaging directly with your clients. We will keep you up to date on opportunities to participate in our activities and activities of our industry partners.
  • Our #CHOICEMATTERS campaign has gathered momentum and we encourage you to show your support by pledging if you have not done so already. You can also share this with your networks to ensure the support continues to grow.
  • The MFAA have launched a campaign in support of you and the industry – we are backing this campaign and again invite you to get behind it to further promote the messages. View campaign resources.
  • A Connective broker has set up a change.org petition which has gained huge support. Sign the petition here.

#CHOICEMATTERS
Mortgage brokers offer value, service and choice.