UBS: mortgage brokers a $2.4bn waste of money

From Mortgage Professional Australia.

Broker commissions are “an illustration of excesses built into the financial system” according to a damning report on brokers by UBS.

Yesterday the global investment bank sent out an analyst note entitled ‘Are Mortgage Brokers Overpaid?’ which argued that broker commissions, which they state exceeded $2.4bn in 2015, should be cut.

UBS analysts Jonathan Mott and Rachel Bentvelzen wrote that “Average commissions are now $4,600 per mortgage, which we believe is disproportionate for advice provided on a simple, commoditised, single product, particularly when compared to the fees charged by Financial Advisors for ‘simple’ financial advice ($200 to $700).”

Broker commissions add 16bp per annum to the interest rate of every single mortgage customer, whether broker originated or not, the analysts claim. They note that commissions accounted for 23% of the costs in the major banks’ personal/consumer divisions in 2015. They do however note mortgage broker costs are not commonly disclosed by the banks.

The report warns that “we expect the banks to negotiate materially lower fee-for-service mortgage commissions in coming months”. They suggest that the advice for mortgages could be provided by robo-advice and the savings could be passed onto brokers “which could help offset anticipated repricing for the Bank Levy.”

Fiery response from the industry

“This report is garbage” responded FBAA executive director Peter White when asked for comment. White questioned the $4,600 figure used by UBS, saying the average commission was more like $2,500-$3,500 a deal. Whilst noting that banks did have the power to renegotiate commissions, White argued ASIC’s recent Review of Mortgage Broker Remuneration identified no reason for such a change.

Brokers should not be concerned by the report, according to White, who said that any changes to commissions would be at most ‘tweaking’.

MFAA CEO Mike Felton claimed UBS’ calculations had a fatal flaw: “Unfortunately, this report’s key finding is wrong. UBS has taken the 2015 upfront commissions plus the 2015 trail commissions (which includes commissions on all loans written by brokers in past years), and divided them by only the number of mortgages written in 2015. This has given them a commission per mortgage that is about double what it actually is in the year of acquisition.”

“We are extremely disappointed that a reputable organisation would issue a report like this without ensuring that the data they’re working with is correct.”

Felton also warned that UBS had misinterpreted the findings of ASIC’s review, which UBS took to show risks posed by brokers but the MFAA saw as showing no evidence of systematic harm caused by brokers.

Banks voting with their feet

Commissions are already under review by the banks, following the publication of the Sedgwick Review. Consequently, all major and several non-major banks have now committed to decoupling commissions from loan size by 2020. Sedgwick did not, however, recommend necessarily reducing commissions.

UBS’ report comes on the same day that HSBC revealed it is re-entering the broker channel in partnership with Aussie Home Loans, a move Aussie CEO James Symond claimed was “a vote of confidence in mortgage broking, considering the ASIC report, Sedgwick Report, bank levies.”

Symond added that “HSBC is such a prestigious, prominent, global player and for them to be jumping into the mortgage broking marketplace is not to be underestimated in terms of the confidence they have in the industry.”

UBS’ numbers

  • Total broker commissions in 2015: $2.4bn
  • 18% increase in broker commissions since FY2012
  • $4,623 – average commission per mortgage
  • 22.6% of banks’ personal consumer costs down to commissions
  • 16bp total cost of mortgage broker commission for every mortgage

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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