A pinball machine sits in the reception of our offices. For stress relief, I am rather partial to the occasional game. It struck me that pinball is an ideal metaphor for mortgage broking: brokers are like the ball – constantly being bumped around at the whim of big external players, bounced off the bumpers to help others score points. For some brokers, the potential abolition of trail might spell “Tilt” or even “Game Over”.
But never fear, for what I’ve always liked about pinball is that it has five balls. So even if you suffer a loss, if you understand the game and how to play, you can keep playing. Here are some tips from a “pinball wizard” on how to play on in the current environment, and perhaps even earn bonus points and an extra ball.
1. The UK trail experience
In 2014, trail commission was banned on new products in the UK. Two years later, it was completely abolished. Yet concerns over churn have seen UK lenders pay retention fees to brokers, to encourage consumers not to switch lenders. In effect, these ‘retention fees’ are just another name for trail commissions. So even if trail is abolished in Australia, it seems likely that trail will reappear in another form – another ball.
2. Federal election pressure on the ALP
The Liberal party’s turnaround in their stance on trail clearly shows the power of political pressure. With the ALP still planning to remove trail for new loans from 2020, the Liberals’ win in the recent NSW state election could lead Labour to reconsider its position, as they try to win votes in the upcoming Federal election. Notice that the ALP rhetoric is starting to shift – they recognise that bumping the machine too hard could lose them lots of credits.
3. Our exclusive revenue projection calculator
We have built an indicative revenue projection calculator which is available here. Our modelling indicates that even if trail is abolished on new products, many brokers’ income will actually improve in the medium term due to the combination of larger upfront commissions, coupled with grandfathered trail payments. Think of it as a period of double scores and more points for playing on.
4. The FOFA experience
Even if the ALP wins the election and abolishes trail, they’ll have to enact legislation to this effect, which must then pass through the Senate. In the case of financial advisers, the FOFA legislation was supposed to be passed relatively quickly but ended up taking over 18 months. And even then, it was watered down from the original proposal. In short, even if the current trail regime does change, it is likely to be some time before any changes take effect. So there is time to play until the credits expire.
At TrailBlazer Finance, we’re optimistic about the future of the mortgage broking industry. We’re playing on, writing more loans than ever to help mortgage brokers grow their business. Whatever happens to trail, the game isn’t nearly over. In fact, I can see smart players racking up some pretty big scores.
The Royal Commission was charged with uncovering misconduct in the banking and wider financial services industry. The major banks were intended to be the primary target of the investigations. Instead, it seems the innocent bystander – the mortgage broker – stands accused. Not of wrongdoing, but of receiving potentially conflicted remuneration. By contrast, some of the testimony against the major banks was horrific. Yet, the Commission has chosen to penalise mortgage brokers over banks, leaving the banks’ core business largely unchanged.
Here’s why I believe Commissioner Hayne got it wrong for brokers, and what action we can take in response to Hayne’s recommendations:
1. The flawed user-pays system
First home buyers,those from low socio-economic backgrounds, and those with low financial literacy, are the ones who can least afford to pay for brokers’ services. They are also the ones who need brokers most. The user-pays system recommended by Hayne will harm those who need brokers most, when they are making the most expensive purchase of their lives. This especially at a time when acquiring, in many cases, the largest asset they will own. Let’s face it: stamp duty, mortgage tax, removalists fees and legals can’t be avoided. So, consumers being asked to reach into their pocket to pay yet another fee are going to struggle.
2. Reducing market efficiency
Let’s also do the simple maths on the costs of refinancing: today say $1,250 in administrative costs is charged; but if the borrower is required to pay a “loan arrangement fee” (regardless of whether this goes to a lender or the broker) –let’s add say another$2,500. If Hayne has his way, all of us who have a home loan will suddenly face a tripling of the cost of refinancing. The result? It will be cheaper to stay with a funder who has higher rates because the cost of switching is too high. Which means the broker who helps keep the banks competitive (by refinancing clients when banks reprice their back-book) are rendered ineffective by the tripled cost of switching. How does that help competition and keep the banks in line?
3. Consumers prefer brokers, not banks
Consumers have increasingly chosen to use mortgage brokers over going directly to banks. The broking channel has many advantages, including ease of use, cultural alignment and accessibility. Consumers have increasingly voted with their feet. It’s no accident that 60% of people prefer using a broker. Among those users, there’s a 96% satisfaction rating. With these figures, does the potential for conflicted remuneration really warrant the removal of commissions? This is akin to me deciding I would love to have a family and kids – but they might fight – and there may be “conflict”. So, let’s mandate celibacy!
4. Reduced competition
Very few banks have distribution networks across Australia, especially in rural areas. If consumers can’t access alternative funders because distribution channels have been cut off, then competition is restricted. Our small Australian market needs more, not less competition, to provide better choices for home buyers. Look at the case studies of the reduction in bank competition in the Netherlands or in jurisdictions where broker commissions were switched off only to be switched back on. Can’t we learn from others’ mistakes before we repeat them?
5. Built-in checks and balances
Commissioner Hayne is concerned that brokers could recommend loans with higher interest rates, or larger loans, in order to get bigger trail commissions. His solution? Abolish trail commission and eventually, abolish all upfront commission. But this misunderstands the separation in the role of the broker and the funder. It’s the broker who submits the loan and the bank that ultimately approves it. The broker certainly does not run credit. It is little wonder that the Productivity Commission concluded:
“Fixed fees paid by customers rather than commission structures have been proposed, and would eliminate conflicts, but the cost to competition would be high. Consumers would desert brokers, and smaller lenders (and regional communities with few or no bank branches) would suffer much more than larger lenders, if customers were required to pay for broker advice.“
So, what now?
If enforced, Commissioner Hayne’s recommendations will punish not the banks who charged dead people, but consumers and brokers. I see the punishment, but I am struggling to see the crime. It’s as if an industry has been judged “guilty” before any misconduct occurred! The debate has entered the political arena and the “talk tough” posturing is being used to win votes in the next election.
So, what can you do? Unite like never before. Rally the support of those who have happily used your services. There are literally hundreds of thousands, if not millions of happy consumers who can testify to the value of brokers. Call on them. Ultimately, politicians are interested in votes and re-election, so make it about consumers and voters, not you and broking.
If enough Australians express outrage, the Hayne recommended life sentence has a good chance of being modified and selectively implemented, rather than being blindly enforced.
Join me in the lobbying the Government here:
https://www.change.org/p/federal-treasurer-josh-frydenberg-save-the-mortgage-broking-industry
And show your support for the broker channel here:
https://www.brokerbehindyou.com.au/
As Martin Luther King Jr once said, “Our lives begin to end the day we become silent about the things that matter.”
Within hours of the Hayne Royal commission’s final report being handed down, I was inundated with calls from clients and interested parties, all of the mortgage brokers. Although their words were different, there was a common theme: “Should I be worried? What has happened to the value of my trail book?”, they asked uneasily.
With the Commission recommending the abolition of trail commission on new loans – and the sitting Liberal Government pledging they will enact this recommendation from July 2020 – it’s no surprise that mortgage brokers are concerned. But brokers needn’t panic.
Brokers can take comfort in the knowledge that our valuation methodologies have always focused on the value of the trail in force; with no presumption of the new trail being earned after the valuation date. At times that conservatism may have seemed draconian; now it feels justified. As long as the existing trail is ‘grandfathered’, it continues to exist and therefore remains a source of value and at this time no changes have been made to valuations algorithms.
But what multiple will people pay for that trail? That is a question of supply and demand. Market forces always trump theoretical valuations. In the rising bull-market we experienced over the past few years, books often changed hands at premiums to valuation. This is no different from what we’ve seen in the property market. If there is panic selling or a rush to exit, books may trade at a lower price for a while.
At the same time, it’s important to remember that the Commission’s recommendations are just that: recommendations. Until the Senate passes new laws, their commendations are not binding; politicians can change their stance depending on constituent pressure (think Malcolm Turnbull and climate change); and with elections looming we don’t even know which party will be in power, let alone what will be traded, as politicians wrangle to be elected.
In the meantime, as long as funding lines don’t dry up, it’s business as usual. We continue to receive calls and emails from brokers seeking guidance, funding and exit options and buying opportunities. Brokers are resilient beasts (they have no choice!) so I expect that most will adapt rather than succumb.
I’m proud to share that only today we issued an agreement to acquire a book at a valuation agreed last year– so we are standing our ground and supporting brokers as they face the changes and transitions likely to arise out of the Royal Commission.
2019 is likely to be a challenging and scary time for many in our industry. And Australia may – depending on political manoeuvres – join most other countries in not paying trail commissions to brokers. While this could become our sad reality, it is not the end of the road for well-resourced and well-capitalised brokers. On the contrary, those brokers who are able to adapt are likely to flourish, as struggling participants exit, or are absorbed into larger groups, and the market thins out. Those with the means and the will to persevere will not only survive but very likely emerge larger and stronger.
Unlike the fictional Chicken Little who created hysteria with her scaremongering -“The sky is falling!” – I am confident that the Hayne Commission’s findings do not spell the end of the broking industry for all.
