There is a risk that the big banks are using brokers as a shield to divert attention away from allegations of their systemic issues, stifling of competition and massive community trust deficit.
If this is the case and it proves successful for the big banks, this strategy will result in three particularly bad outcomes for Australian consumers.
Firstly, it would relieve the banks of the obligation to make the necessary cultural and behavioural changes to restore community trust. Secondly, and more importantly, it would hand them an unassailable stranglehold on the home lending market – and interest rates. Thirdly, customers would be forced to pay for the banks’ acquisition costs, while the banks will receive the economic value on the more than half of all home loans currently written by brokers, at little or no cost.
Calls by Westpac for further consideration of a consumer-based fee for service appear to be entirely self-serving. This is not a viable solution to improve transparency around broker commissions, fees and costs to help consumers to make more informed choices. It will simply tip the balance back in favour of branch-based lending by making it significantly more expensive for a customer to use a broker rather than a bank branch to get a home loan.
Smaller lenders who do not have branch networks will be pushed out of the market, reducing competition, and allowing the big banks to restore the massive net margins they had on mortgage products before broking gave consumers access to competitive financial services.
The mortgage broking industry has remained in the media spotlight over the past week, fuelled by the comments of Westpac CEO, Brian Hartzer, at the Australian Financial Review Banking & Wealth Summit, where he suggested that a consumer fee for service remuneration model could be considered.
Whilst we understand that such scrutiny is the new norm for the industry, we remain concerned about how ill-informed it is – especially when it comes to the potential motives of the big banks that are most likely to gain from it.
What is not being acknowledged in the discussion, is that a consumer fee for service remuneration model has been considered and ruled out by: the Combined Industry Forum (CIF), of which Westpac and the other large banks are members; ASIC, in its extensive review of mortgage broker remuneration; and the Australian Bankers’ Association, both via the independent Retail Banking Review and in its submission on the Productivity Commission’s Draft Report into Competition in the Financial Services sector.
The CIF previously provided a strong criticism of consumer fee for service stating:
“While consumer paid fee for service may reduce lender choice and product strategy conflicts, it will negatively impact competition and customer outcomes; result in additional direct costs to consumers to access the broker channel; diminish the broker value proposition to the customer; put brokers at a significant disadvantage to the lender branch channel (who do not charge direct fees); likely result in rationalisation of broker numbers, increasing barriers to entry for new lenders, whilst disadvantage smaller lenders and those without a branch footprint; is unlikely to correlate to economic value produced by the broker; and could result in brokers servicing a much narrower band of customers.”*
While a consumer fee for service model would harm customers (especially in rural and regional Australia), reduce competition and hurt broker small businesses, it would significantly benefit the big banks, providing them with an unassailable stranglehold on the home lending market and interest rates.
Let’s be clear: brokers deliver enormous economic value to the banks, and now some big banks want customers to pay for it. This is like asking a home buyer to pay the auctioneer and vendor’s selling costs.
More concerning is the fact that such a remuneration model would significantly impact competition in the home lending market. The CIF report acknowledged that a consumer-based fee for service would:
“… put brokers at a significant disadvantage to the lender branch channel (which does not charge direct fees); likely result in rationalisation of broker numbers, increasing barriers to entry for new lenders, whilst disadvantage smaller lenders and those without a branch footprint…”
The competition brought to the mortgage lending market by brokers has reduced the average net interest margins of the big four banks on mortgage lending products and substantially increased innovation.
If a consumer-based fee for service is introduced, customers will not just face new broker charges, but higher interest rates as the big four banks would then be permitted to restore their lost interest margins.
It is therefore not surprising that a large bank would advocate for a consumer-based fee for service – clearly it would be very good for their profitability and their shareholders, however it would be a very poor outcome for competition and Australian consumers.