The Royal Commission – what is the big deal?
From mid-next year, banks will be banned from paying mortgage brokers “trail commissions” — described witheringly by Commissioner Kenneth Hayne QC as “money for nothing” — on new loans.
Instead, the commission has recommended the abolishment of trails. He has suggested that borrower, not the lender, should pay the mortgage broker an upfront fee – effectively turning the business model of the $2.1 billion industry on its head.
So what does this mean for you as a consumer?
There is a Royal Commission, but we are still open for business and we are delivering the same trusted service and advice that we always have.
Below, I answer the most common questions I’ve been asked this week:
1. How will banning trail commission impact the brokerage industry in Australia?
Trail commissions are the underlying backbone of every mortgage broking business. It was introduced in exchange for a reduced upfront payment, and it is what keeps brokers operating and able to work to provide our clients with the services they need – at no cost to them.
To say that trail is “money for nothing” really demonstrates the lack of understanding of what it is that brokers do for our clients, and the value we bring to your everyday lives as you work to achieve your property ownership goals.
Trail pays for us to provide you, our clients, with annual mortgage reviews, arrange top-ups to existing loans, and negotiate with the banks on your behalf for rate decreases, changes to loan structures, issues with accounts etc. This is in your best interest, but also the banks’ best interest – as restructuring your debts direct with the bank is preferable to them, to you refinancing altogether to a different lender!
Without trail, the transparency, tailored advice and free market choice is removed. The removal of trail will also see a lot of brokerages unable to cover their overheads of rent, staff, superannuation, insurances and industry fees. These businesses are at the greatest risk of being forced to close down.
2. How will removing trail drive less competition in banking?
Mortgage brokers drive business to the smaller, non-bank lenders, who are also going to have their businesses impacted severely. These smaller lenders are so important to keep competition alive and prevent an oligopoly by the Big 4. These lenders rely almost 100% on the broker channel for business as they don’t have branches or mobile lenders – which allows them to keep their rates low, applying pressure to the Big 4 to do the same. With less brokers bringing this business in, there is a real risk that these lenders will also need to close their doors.
3. What does this mean for consumers?
First homebuyers are especially vulnerable, as they often have little knowledge about the different options available or the various policies that might exclude them from obtaining finance from, say, a Big 4 bank. Too often we see people who have been declined finance at several lenders before coming to us, because they didn’t understand the process or policies. It’s these clients that we do the most work for upfront – we educate, we research, we hold their hand every step of the way. We work with them on budgeting and savings plans, sometimes for months or years (without charge) before they are ready to commit to a mortgage.
Similarly, investors can be subjected to lending policy that is restrictive and often feel they have exhausted all avenues in seeking finance to continue growing their investment portfolios. It is not uncommon for us to find that they have been incorrectly structured with financial products that do not suit their wealth creation strategies and/or have been provided incorrect or generic advice by a banker, that does not promote their overall financial wellbeing. In many cases, an experienced broker can save investors loads of interest as well as providing them better debt structures, through having access to the multiple lenders. We project manage the whole process with their accountant and financial planner, and work on achieving a better overall consumer outcome – all before earning that commission cheque.
Where do we go from here?
Realistically, these recommendations have devastated the broking industry. Brokers that have spent decades building their client base have had their business’ value and probably 70% of their income potentially wiped out overnight, if the proposed changes to upfront commission are also implemented…
We know that mortgage brokers are far worse off under these recommendations – and consumers are going to be worse off under these recommendations, too. The only winners here are the larger banks.
For now, it’s business as usual at Classic, with us helping you find solutions as we always have. We would love your continued support over the coming months as we work through what this means for our industry.
If you would like to share your story with us about how we have helped you, please drop us a line. We would love to hear from you and thank you for your ongoing support!