The Adviser surveyed 766 brokers over two days last week and found that 88 per cent were more concerned about channel conflict than they were 12 months ago.<
Over 93 per cent of brokers cited the major banks as their biggest concern.
More than half of brokers surveyed (55 per cent) said channel conflict had influenced which lenders they recommended to clients over the last 12 months. However, 74 per cent of brokers said channel conflict would influence which lenders they recommend to clients over the coming 12 months.
Over 78 per cent of brokers admitted they had lost a client as a result of a direct approach from a lender. Of those brokers who lost a client through channel conflict, 97 per cent said the major banks and their subsidiaries were responsible.
The survey results are part of a well-established trend taking place in the third-party channel. As fears mount over channel conflict and the majority of brokers admit to losing clients, sentiment towards the big four banks is clearly trending downward.
Aggregators have reported a notable shift in the flow of mortgages to the majors. The latest AFG Competition Index, released in March, found that the big four lost 6.55 per cent share of broker-originated loans over a 12-month period.
The major banks and their subsidiaries (ANZ, CBA, Bankwest, NAB, Westpac, Bank of Melbourne, Bank SA, and St.George Bank) saw 65.25 per cent of all mortgages written to them through the broker channel in the quarter to February 2017, according to the Index.
While this figure is up from the low of 64.09 per cent in the quarter to December 2016, it is markedly down from the comparative period last year, when the majors accounted for 71.8 per cent of all mortgages written by the third-party channel.
Meanwhile, information gathered by Momentum Intelligence for its Third-Party Lending Report: Major Banks 2017, suggests that the dominance of the big four banks is being undermined by a growing dissatisfaction among mortgage brokers.
As brokers, lenders and consumers go head-to-head over ASIC’s remuneration review, the man behind it gives MPA editor Sam Richardson an insider’s view
ASIC launched its review of broker remuneration in November 2015, and since then brokers have talked about little else. It’s very possible you’ve at some point criticised ‘those bureaucrats at ASIC’; if so, Michael Saadat is your man. You won’t find Saadat’s name in the review, but ASIC’s senior executive leader played a huge role in its production, staying behind the scenes. Now, two years later, he’s finally free to talk about the review and how it could change your business.
What ASIC wants
Over two years ASIC collected 200 million data points from 1.4 million home loans, before boiling that data down to 243 pages. “It was a very time-consuming process,” Saadat recalls. “Not only did we look at the raw data and provide conclusions, but we also controlled the data for customer characteristics.”
In their quest to achieve an ‘apples for apples’ comparison of broker and non-broker customers, Saadat and his team broke down comparisons into, for instance, the difference in loan amounts taken out by low-income customers going to brokers and to banks.
Now ASIC is explaining its methodology and the data it has collected to the industry.
“We’ve had a few roundtable discussions with stakeholders; we’re planning on having more, and when we speak at industry events or conferences we will definitely be discussing the report and taking questions from people who are interested in hearing more about it,” Saadat says. At the time of writing he was confirmed to speak at the Annual Credit Law Conference in October.
These discussions will chiefly concern ASIC’s six proposals. Firstly, ASIC wants to change the standard commission model to take into account factors other than loan size (1). It also recommends moving away from bonus commissions (2) and soft-dollar benefits (3). ASIC believes there should be clearer disclosure of ownership structures (4) and proposes establishing a new public reporting regime on consumer outcomes and competition in the home loan market (5). Finally, ASIC wants to improve the oversight of brokers by lenders and aggregators (6).
Now that the review has moved into the consultation phase, Saadat is effectively powerless. Under Minister for Revenue and Financial Services Kelly O’Dwyer, the Treasury will be managing the process, in which industry associations, lenders, aggregators, consumer groups and individuals can have their say on the proposals before the end of June. Saadat, however, will not be taking part: “We wouldn’t put in a submission to our own report.”
On the sidelines
ASIC is now consigned to the role of spectator, left on the sidelines, observing the furore surrounding the separate Sedgwick review, which published its final report a few weeks after ASIC’s.
Stephen Sedgwick’s Australian Bankers Association-sponsored review ran concurrently with ASIC’s, but Saadat insists there was no collaboration between the two. “[ASIC] did not share any data with him that has not been made public by ASIC,” he says.
ASIC was right to refer to the Sedgwick review, Saadat insists: “We know the Sedgwick review only covers the banks, and that’s why we said in our report that the banks need to work with the rest of the industry in responding to [ASIC’s] recommendations.”
When writing his report, Saadat had no idea what Sedgwick’s recommendations would be; in fact Sedgwick’s final report was published just 30 minutes before Saadat talked to MPA.
Sedgwick’s recommendations go much further than ASIC’s, urging banks to decouple commission from loan size. ASIC had recommended a change to the standard commission model to avoid incentivising brokers to write larger loans, while recommending that banks work with brokers to develop a response.
Instead the major banks, on the day Sedgwick published his recommendations, all agreed to implement them in full by 2020. This unilateral decision bypassed brokers, ASIC and the Treasury’s consultation process.
Despite this, Saadat says he is “pleased that industry is working to improve remuneration structures to create better outcomes for consumers, and improved trust in the sector”.
Acknowledging the review and the banks’ response, he “encourage[s] all industry stakeholders to provide feedback to Treasury as part of the current consultation process”. Commissions, in Saadat’s view, “are obviously commercial arrangements, and it’s up to both individual banks, aggregators and brokers businesses to work out what those commercial arrangements should be”.
Regardless of whether Saadat or Sedgwick get their way, ASIC’s remit looks likely to expand. Sedgwick and the banks want ASIC to enact regulation to facilitate a move to a new commission structure, while ASIC will play a role in implementing whatever rule changes the government decides to introduce after June. wFurthermore, Saadat explains, “ASIC’s ability to intervene may also be bolstered by law reform proposals that are currently being considered by government, including those recommended by the Financial System Inquiry”.
Already Saadat has more immediate work on his plate: a shadow-shopping of brokers by consumers, which he will start planning by the end of 2017. “It is early days,” Saadat says. “We’re planning on commencing that work before the end of this calendar year, and are still working through the detail.” Shadow shopping will take place, Saadat confirms, regardless of the Treasury’s ongoing consultation process on the remuneration review, and “once it kicks off it’s going to be a pretty significant piece of work”.
ASIC’s work will not end with commissions. Instead Saadat and his team are faced with a Sisyphean task. The role of referrers was flagged by the review for further investigation, while consumer groups have demanded more oversight of cross-selling. And, says Saadat, the data that was published was just the tip of the iceberg.
For now it’s up to the industry to make changes, he says. “It was more about us trying to get the industry to respond without being forced by legislation to have change imposed upon them. We think the industry has an opportunity to respond and to take positive steps to make changes that will deliver wimproved consumer outcomes without necessarily needing the government to legislate for changes.”
ASIC says it has permanently banned a former mortgage broker, from the credit and financial services industries.
The bans follow an ASIC investigation which led to the former mortgage broker with AHL Investments Pty Ltd (trading as Aussie), being convicted in Downing Centre Local Court on eighteen charges relating to home loan fraud. On each of the eighteen charges, he was convicted and released upon entering in to a recognizance of $1,000 with the condition that he be of good behaviour for three years (refer: 16-293MR).
ASIC’s investigation found that he provided documents in support of eighteen loan applications knowing that they contained false or misleading information.
The applications contained letters which purported to be from the applicant’s employer. These documents were false and in most instances, the loan applicant had never worked for the particular employer.
He has the right to appeal to the Administrative Appeals Tribunal (AAT) for a review of ASIC’s decision.
On 5 July 2016, through his solicitor, he pleaded guilty to seventeen charges under section 160D of the National Consumer Credit Protection Act 2009 (the Credit Act) and one charge under the former Section 33(2) of the Credit Act while he was engaging in credit activity on behalf of Aussie. Section 160D (and the former Section 33(2)) makes it an offence for a person engaging in credit activities to give false or misleading information or documents to another person.
He provided false employment documents to secure approvals for home loans, submitted to Westpac Banking Corporation (Westpac), Australia and New Zealand Banking Group (ANZ) and National Australia Bank (NAB) (refer:16-219MR).
On each of the eighteen charges, He was convicted and released upon entering into a recognizance of $1,000 on the condition that he be of good behaviour for three years (refer:16-293MR).
Since becoming the national regulator of consumer credit on 1 July 2010, ASIC has investigated in excess of 100 matters relating to loan fraud and has achieved many enforcement outcomes against the offenders. The outcomes range from undertakings by persons to voluntarily leave the industry, to bans and prosecutions.
To date, ASIC has banned, suspended or placed conditions of the licence of 80 individuals or companies from providing credit services (including 35 permanent bans). Through the Commonwealth Director of Public Prosecutions, ASIC has brought criminal prosecutions against 14 credit service providers; with 12 having been convicted of fraud or dishonesty offences relating to the provision of false and misleading information or documents to lenders in client loan applications.
ASIC says it has permanently banned a former Perth-based finance broker from engaging in credit activities.
ASIC found that the broker engaged in misleading conduct by providing false income supporting documents to Westpac Banking Corporation Limited in support of home loan applications for three of his clients in 2015. Only one of the three loan applications was approved.
At the time, the broker was operating his own finance broking business through his own credit licence under the trading name Active Approvals. His credit licence was cancelled in April 2016 at his request.
ASIC Deputy Chairman Peter Kell said the banning reinforces the strong message to any broker considering engaging in misleading conduct.
‘ASIC will not hesitate to permanently remove those who engage in misleading conduct from the industry,’ Mr Kell said.
The broker has the right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decision.
Since becoming the national regulator of consumer credit on 1 July 2010, ASIC has investigated in excess of 100 matters relating to loan fraud and has achieved many enforcement outcomes against the offenders.
The outcomes range from undertakings by persons to voluntarily leave the industry, to bans and prosecutions. To date, ASIC has banned, suspended or placed conditions of the licence of 77 individuals or companies from providing credit services (including 33 permanent bans).
Through the Office of the Commonwealth Director of Public Prosecutions, ASIC has also brought criminal prosecutions against 14 credit service providers; with 12 having been convicted of fraud or dishonesty offences relating to the provision of false and misleading information/documents to lenders in client loan applications.
HSBC has announced it is returning to the broker channel in April 2017, ten years after exiting the third party mortgage distribution sector and selling its broker-originated loan book to RESIMAC, according to the Australian Financial Review (AFR).
The news comes as a surprise to some, given the bank’s ten year hiatus, but less so for others, given HSBC has been missing out on a big piece of the home loan pie for the last ten years, with mortgage brokers now writing over 53% of all home loans in Australia.
In her role as head of Mortgages, HSBC’s Alice Del Vecchio is steering the bank’s re-entrance into the third party distribution network, after six years in mortgages at HSBC and a previous role as the national head of mortgages at Aussie.
HSBC has already deployed existing staff to the emerging third party division, the AFR has reported, and it is also hiring business development managers ahead of the April launch date.
HSBC made the news in 2015 when it scaled back its lending to property investors in the wake of APRA’s decision to apply growth caps on investor lending at the end of 2014.
The bank ultimately stopped lending to new to bank property investors, however having decreased its investment loan book by $470 million over the past 12 months, HSBC now appears to be relaxing its clampdown and focusing on growth through distribution.
APRA’s latest lending data shows HSBC’s loan book to be valued at $10.2 billion, with over 50% of this attributed to owner occupiers ($5.5 billion). $4.7 billion is attributed to investors. To put this into perspective, Citigroup has $7.1 billion in housing loans and ING Direct has $39.4 billion.
HSBC recently announced the opening of a private bank in Australia aimed at wealthy customers whose companies already use the corporate or retail bank.
HSBC’s local boss Tony Cripps said this move illustrated the lender’s focus on Australia as a “priority growth market,” according to the AFR.
Virgin Money has announced a partnership with national mortgage aggregator Connective. Starting from November this year, accredited brokers across the network will be able to offer Virgin Money home loans to clients.
Johnny Lockwood, the general manager of lending, cards & deposits for Virgin Money, said that the differentiated products could benefit both brokers and consumers alike.
“We see that our ongoing treatment of customers is very important for our broker partners as well,” he told Australian Broker. “We want to make sure there is a rewarding and ongoing experience for the customer so they are happy with the decision that the broker has assisted them to make and actually give them some repeat business.”
As for the engagement between the aggregators, brokers and Virgin Money, Lockwood said his firm was a true ‘partnership business’.
“For us putting the focus of our mortgage distribution into the third party market really gives brokers the confidence that they are going to be a very strong focus for us now and continually into the future.”
This means that Virgin Money won’t lose sight on the broker channel even once the firm does get a direct channel up, Lockwood assured.
To this end, the lender was expanding its BDM team into Queensland and Western Australia to support brokers on the ground, he said.
Currently, Virgin Money has two BDMs in NSW and one in Victoria with plans to further expand this footprint later on.
“It’s key for us that our aggregator partners such as Connective have people they can talk to face-to-face when they need to.”
He said a key focus was to support customers through a nationwide network of brokers that expanded beyond just the Eastern Seaboard.
Finally, Virgin would work together with the Connective network and their focus on digital marketing support for brokers through various activities and training days, he said.
“Virgin Money is traditionally a direct digital business and we have a lot of expertise in the digital marketing front. That’s certainly something that we can assist our partner brokers with at various times throughout the year to enable them to get the best out of their customer network as well.”
Glenn Lees, CEO of Connective, welcomed the partnership and what it could bring to their network of brokers.
“We’ve been really impressed with Virgin Money’s innovative and collaborative approach and their commitment to providing our members and their customers with a strongly differentiated product offering. It’s great that our members will now be able to harness the power of the incredibly strong Virgin brand.”
The big four bank has closed 173 branches over the last 12 months as it ramps up to drive more business through the third-party channel. You can read DFA research on the growth of the broker channel here.
The JP Morgan Australian Mortgage Industry Report – Volume 23, released yesterday, noted that Westpac was rationalising its branch footprint and improving systems to support the group’s multi-brand strategy.
“Over the last 12 months, Westpac have closed 173 branches (from 1,261 to 1,088) and have improved growth by increasing broker flow modestly from 47 per cent to 49 per cent,” the report said.
“The rationalisation of the distribution network (and ultimate culmination of heritage St.George and Westpac systems nearly 10 years after the merger announcement) should see a ‘cheaper cost to serve’, and allow system growth while protecting margins,” it said.
Commenting on the bank’s decision to close branches in favour of the third-party channel, JP Morgan banking analyst Scott Manning said that while the physical cost of distribution was not actually that high, Westpac’s branches were far less profitable than some of its peers’.
Digital Finance Analytics (DFA) principal Martin North, co-author of the report, highlighted that when it comes to distribution and weighing up branches against brokers, cost is not the key issue.
“It’s not so much a cost question,” Mr North explained, “but more a customer-driven issue. Customers are voting with their feet and choosing to go to mortgage brokers for their mortgage needs, which the banks are now adapting their strategies to,” he said.
“The broker channel has a big influence and we expect it to be a bigger influence going forward.”
Westpac’s decision to reduce its retail footprint follows similar measures taken by ANZ, which were highlighted in JP Morgan’s previous mortgage report back in March.
The report found that despite being the smallest of the four majors in the domestic mortgage market, ANZ has been successful in achieving the same dollar growth in mortgage balances since 2010.
“We believe a key driver of this result has been the success ANZ has had with the broker channel, with originations rising from ~40 per cent of flow to ~50 per cent of flow since 2010,” the report said.
Importantly, the report noted that ANZ has been steadily reducing its branch presence since 2011.
“ANZ is in the unique position where it has consistently grown its loan book above market for the last [few] years at the same time as it is actively reducing its branch presence and increasing its broker presence,” Mr Manning said at the time.
“That is acting as a bit of a business case potentially for other banks to follow,” he said.
“We have previously highlighted our concern for Westpac in particular where they have quite a duplication of their branch presence across different brands.”
At the release of yesterday’s report, Mr Manning said Westpac must work to remove duplications arising from its multi-brand strategy in order to streamline mortgage distribution going forward.
From Mortgage Professional Australia. The Finance Brokers Association of Australia (FBAA) has defended the broker channel against claims by a UBS survey indicating some brokers are advising clients to misrepresent figures on their applications.
The FBAA’s Peter White said the survey claimed that about 6%, or 84 of the 1228 borrowers surveyed said the broker directed misrepresentations in loan applications.
According to the survey, 60% of the borrowers in the sample secured their mortgage from a broker, slightly higher than the nationwide figure.
UBS stated that participants were surveyed anonymously and said, “given the large number and spread of participants, these findings are statistically significant with a 95% degree of confidence”.
The report also stated, “If anything, we believe this data is likely to understate the level of misrepresentation as some respondents may not feel comfortable stating they were not completely factual and accurate even in an anonymous survey.”
But White has questioned the accuracy of the whole survey, saying the amount of people purportedly surveyed represents only an estimated 0.09% of all mortgages settled over the two year time period, and a number of the figures in the survey were inconsistent with APRA data and Industry data.
He also said there was “zero credibility” in the claim of a borrower who admits to falsifying documents.
“Let’s be honest – if you are admitting to misrepresentation on a legal document it’s very easy to blame someone else and claim they made you do it.
“This really should not be taken seriously, particularly with the stringent regulations around the broking sector and responsible lending criteria which brokers adhere to.”
White said the FBAA would not tolerate any unethical behaviour and that there was no incentive for brokers to misdirect clients.
“Our own data tells us that only a miniscule percentage of our members have had action taken against them and that overall, brokers are doing the right thing.
“I believe that not only are these figures wrong but that they are based on claims that can never be verified.
“It is a shame for the industry that this sort of misinformation is publicised but I am confident the regulators, the industry and the public know the truth.”
Mortgage Brokers earnt more than $1.1 billion in new commissions in the last year, as their share of new loans continues to rise according to the latest results from the Digital Finance Analytics Mortgage Industry Model.
The model tracks new loan approvals and channel mix and estimates the commissions earned by brokers from lenders.
The share of loans originated via brokers has reach 50% across the market (some say it is even higher, as much as 60%!)
APRA publishes ADI specific data showing that foreign subsidiary banks originate close to 70% of their loans via brokers, other domestic banks, around half, just above the average of the big four, with credit unions and building societies lower.
Brokers can earn an upfront commission on each new loan, as well as a trail. According to a recent MFAA document:
Lenders usually pay upfront and/or trail commissions in respect of the loans, mortgage brokers originate. The upfront remuneration offered by lenders is mostly uniform at 0.65%, and trail remuneration also uniform at 0.15% for the life of the loan. Lenders vary in their application of claw-back, ranging from 12-24 month terms as well as their introduction of trail payments (delayed until the 13mth).
The MFAA would like to note that broker remuneration provided by lenders has reduced over the past ten (10) years from a mostly uniform offering of 0.70% and 0.25% for upfront and trail commissions
There are however some variations between lenders in the absolute percentage applied, reflecting commission tiers, targets and other factors. It is hard to get solid industry data because commission arrangements are bi-lateral commercial agreements, and often not fully disclosed.
However, using data from a range of sources, taking into account commission rates and new loan volumes, we have an estimate of the monthly flow in new commissions earned. Commissions have been rising in line with loan growth (as it directly related to the size of the loan) as well as rising third party origination. Some lenders have tweaked commission structures recently to incentivise specific types of loans.
So, we estimate over the past year, $1.1 billion of new commissions were paid to brokers. A relevant statistic given the current broker remuneration review by ASIC.
One of Australia’s biggest banks has revealed an overhaul in it broker offering that places a strong emphasis on customer service and reducing channel conflict.
NAB today officially launched its updated broker offering, which now means NAB borrowers introduced through the broker channel will have the same access to NAB services and products as any other customer.
Through the NAB broker platform, brokers now have access to four more home loans; NAB Choice Package, NAB FlexiPlus Mortgage, NAB Tailored Home Loan and NAB Base Variable Rate Home Loan, as well as 10-year interest only periods for investment loans.
Upfront and trail commission is offered on the expanded suite of home loan products, while brokers also have access to a wider range of credit card offerings.
Steve Kane, NAB broker offering general manager, said today’s launch is a significant step for the bank and signifies the final step in an ongoing process to strengthen the connection between it and the broker network.
“We had the Homeside brand that didn’t really resonate and put a hurdle in front of brokers when they were talking to their customers. We made a decision to move to NAB Broker and remove the Homeside brand, but the operation stayed the same,” Kane told Australian Broker.
“This is the final stage of that journey, which is really about using the full power of the NAB brand, all the process and services of NAB and all the channels of NAB to support brokers. This is really as much a statement about launching NAB back into the broker market,” he said.
As well as allowing broker clients access to a wider range of products, Kane said the new NAB Broker offering will have a strong emphasis on customer service, which will hopefully lead to a stronger broker–client relationship.
“The position that brokers are now taking is… more and more a long term relationship, rather than transactional one,” Kane told Australian Broker.
“A significant number of brokers are now looking at the whole lifecycle of the customer and part of this rebrand is talking about the broker as a trusted adviser and we’re talking about broking for life.
“We need to be able to offer a holistic range of products and services to support the brokers in doing that, rather than just a mortgage.”
Kane said a new initiative, where select NAB Branches will have staff dedicated solely to broker introduced customers, will hopefully achieve that goal as well as helping to reduce channel conflict.
Under the initiative, brokers can refer their clients to a NAB branch, where dedicated broker channel staff will ensure their accounts and other facilities are set up properly. Those staff are not on a sales incentive program meaning brokers don’t have to fear losing the client.
“The broker is in charge of the products they want to sell the customer. We’re not trying to say we’ll take it all over. What we’ll be doing is ensuring all their accounts and facilities are set up correctly,” Kane told Australian Broker.
“It’s not about competition between channels; it’s targeted at customer service. But it’s not targeted at customer service to the detriment of the broker channel.
“We will always respect the primacy of the broker-client relationship. If a customer came in and said I want a transaction account, we might set them up for that, but on their file brokers can indicate they have a financial planning business or whatever else we won’t do anything that conflicts with that.”