Mortgage brokers are flying high but there may be challenges ahead, explain La Trobe Financial's Chris Andrews and Daryl Hill.
La Trobe Financial head of funds management Chris Andrews and head of major clients Daryl Hill explain why the future is bright for mortgage brokers, and the challenges that this future may hold.
MPA: What do you think are the main issues that brokers will face in the year ahead?
At one level the broker community now has distinct similarities with the distribution side of the financial planning community.
Like the financial planning community where advice is given to Australians regarding investment of their savings, brokers give recommendations regarding which loan would best suit a client’s requirements and objectives – all under the regulatory parameters of responsible lending to ensure the loan recommended is not unsuitable.
The broker industry has just settled in ‘regulatory round one’ from government in regard to increased [ACL] licence requirements, external dispute resolution [EDR] scheme membership, insurance required to operate, and is now open to regular surveillance by ASIC. Interestingly, ASIC, at the time of this interview, is conducting individual targeted broker surveillances on 90 separate broker groups.
MPA: Where may this activity lead?
We need look no further than recent Senate Enquiry submissions about the role of ASIC, where both ASIC and COSL state that the majority of NCCP non-compliance is from the broker sector. Additionally, both COSL’s and FOS’s annual reports show brokers are the greatest cause of borrower complaints to the EDR body.
With well over 10,000 brokers practising across Australia, we are not sure if this comment is helpful in any way, and may merely be a reflection that most of the brokers perform their tasks and jobs extremely well. However, it may not be long before ASIC is ‘media directed’ to implement ‘regulatory round two’ because of the perception of repeated non-compliance and consumer complaints.
Regulatory round two could result in a full-frontal attack on mortgage broker trail commissions. We say this merely as a weather alert for mortgage brokers, as commission-based selling has been historically problematic for regulators. Regulators will always see trail commissions and high upfront inducement payments as potentially conflicting with any recommendation. The rebate model may have to make a comeback.
MPA: How are brokers perceived at present?
The broker brand in the mind of the public is currently at a peak because brokers are perceived by the public as impartial. That is, independent from the seller or manufacturer of the underlying product, and – in the case of mortgage brokers – independent from the banks. This independence and positive image is something to protect, as it has been hard earned over many years by thousands of hard-working, ethical brokers across the country.
The reality about independence, however, is changing – and will change further as banks seek to further control the distribution channel of the $1.2trn home loan market.
Early in 2013 bankmecu acting CEO Robert Allen said: “There is growing concern that the major banks are creating a veneer of competition through their ownership of various sub-brands”. La Trobe Financial does not subscribe to this view, because we know how contested the marketplace for home loans really is. However, we do believe this remains a potentially vexing matter for the public.
MPA: Are there any other issues of concern to brokers?
Other macro issues facing the mortgage broker community at this time include:
MPA: Are there any key skills that brokers need to boost their business?
Brokers must continue to move to a ‘trusted adviser’ role for their customers. Brokers must grow their business past a single transaction product into more products and more services, which will assist greater client relationships, client retention, and client profitability.
Many brokers will be faced with increased 24/7 loan approval technology encroaching on their patch as banks implement direct-to-consumer technology platforms in early 2014. Brokers need to maintain a compelling reason why consumers come to them for convenience under this future scenario, and ‘independence’ is the key brand proposition.
One area brokers could consider reviewing is their ability to deal with clients who require specialist lending alternative products, and placement of small – less than $5m – commercial loan transactions as an addendum to their present service offerings.
MPA: Where do you stand on diversification?
This convergence is simply irresistible over time and is already supported through the two separate but similar legislations covering both sides. Brokers, if they can partner with the correct counterparty, will augment their businesses long term and transform into a deeply valuable source of advice for consumers, and enhance the valuation of their business.
MPA: What do you think are the main issues that brokers will face in the year ahead?
At one level the broker community now has distinct similarities with the distribution side of the financial planning community.
Like the financial planning community where advice is given to Australians regarding investment of their savings, brokers give recommendations regarding which loan would best suit a client’s requirements and objectives – all under the regulatory parameters of responsible lending to ensure the loan recommended is not unsuitable.
The broker industry has just settled in ‘regulatory round one’ from government in regard to increased [ACL] licence requirements, external dispute resolution [EDR] scheme membership, insurance required to operate, and is now open to regular surveillance by ASIC. Interestingly, ASIC, at the time of this interview, is conducting individual targeted broker surveillances on 90 separate broker groups.
MPA: Where may this activity lead?
We need look no further than recent Senate Enquiry submissions about the role of ASIC, where both ASIC and COSL state that the majority of NCCP non-compliance is from the broker sector. Additionally, both COSL’s and FOS’s annual reports show brokers are the greatest cause of borrower complaints to the EDR body.
With well over 10,000 brokers practising across Australia, we are not sure if this comment is helpful in any way, and may merely be a reflection that most of the brokers perform their tasks and jobs extremely well. However, it may not be long before ASIC is ‘media directed’ to implement ‘regulatory round two’ because of the perception of repeated non-compliance and consumer complaints.
Regulatory round two could result in a full-frontal attack on mortgage broker trail commissions. We say this merely as a weather alert for mortgage brokers, as commission-based selling has been historically problematic for regulators. Regulators will always see trail commissions and high upfront inducement payments as potentially conflicting with any recommendation. The rebate model may have to make a comeback.
MPA: How are brokers perceived at present?
The broker brand in the mind of the public is currently at a peak because brokers are perceived by the public as impartial. That is, independent from the seller or manufacturer of the underlying product, and – in the case of mortgage brokers – independent from the banks. This independence and positive image is something to protect, as it has been hard earned over many years by thousands of hard-working, ethical brokers across the country.
The reality about independence, however, is changing – and will change further as banks seek to further control the distribution channel of the $1.2trn home loan market.
Early in 2013 bankmecu acting CEO Robert Allen said: “There is growing concern that the major banks are creating a veneer of competition through their ownership of various sub-brands”. La Trobe Financial does not subscribe to this view, because we know how contested the marketplace for home loans really is. However, we do believe this remains a potentially vexing matter for the public.
MPA: Are there any other issues of concern to brokers?
Other macro issues facing the mortgage broker community at this time include:
- a shrinking revenue base;
- competition from direct channels;
- competition from ‘best rate online 24/7’ sites;
- growing the business ‘as a business’, and integration to broader financial services life cycle;
- conflicted remuneration within white label products, where brokers can influence the price a consumer pays; and
- transferability of clients from aggregators – the industry must become like the financial planning industry where, for the past 10 years, planners have, with a client authority, been able to move their clients and trail to a new provider.
MPA: Are there any key skills that brokers need to boost their business?
Brokers must continue to move to a ‘trusted adviser’ role for their customers. Brokers must grow their business past a single transaction product into more products and more services, which will assist greater client relationships, client retention, and client profitability.
Many brokers will be faced with increased 24/7 loan approval technology encroaching on their patch as banks implement direct-to-consumer technology platforms in early 2014. Brokers need to maintain a compelling reason why consumers come to them for convenience under this future scenario, and ‘independence’ is the key brand proposition.
One area brokers could consider reviewing is their ability to deal with clients who require specialist lending alternative products, and placement of small – less than $5m – commercial loan transactions as an addendum to their present service offerings.
MPA: Where do you stand on diversification?
This convergence is simply irresistible over time and is already supported through the two separate but similar legislations covering both sides. Brokers, if they can partner with the correct counterparty, will augment their businesses long term and transform into a deeply valuable source of advice for consumers, and enhance the valuation of their business.
