How Loan Market will keep the industry and market competitive for all Australians
Opinion: Sam White, Loan Market Group's Executive Chairman
Over 23 years ago Loan Market entered the market as a proudly home-grown Australian and family owned and led financial services business. We’re part of the White Family Group which includes Australia’s largest real estate brand; Ray White that was started by my Great Grandfather in Crows Nest, Queensland in 1902.
We started operating in 1994, at the inception of the broker channel with Aussie Home Loans and Wizard Home Loans. We came into the industry to keep the market competitive for Australians and we still do that.
Over that time I’ve witnessed the industry shift, change and evolve. Always adapting with our customers best interest front and centre.
However, as an industry, we haven’t always gotten it right.
Together we’ve adapted to new regulations, endured macro-prudential measures forced on the banks, we’ve navigated the ASIC remuneration review, the Sedgwick report, a Productivity Commission and, now the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
It’s been a turbulent time for the industry.
What started as a Royal Commission into banks has dramatically shifted to the broking industry - an industry that as you know is made up of over 10,000 small businesses across Australia, of which Loan Market represents 550 in Australia alone.
Pride in the industry
What’s disappointing is that the reputation of the industry has taken a beating.
I am proud of what we do for customers and for the way we have constantly driven improvements in customer outcomes.
This satisfaction, as measured in Loan Market’s case by our Net Promoter Score that is consistently above 88, has meant that over half (53% in fact) of all Australians now use a mortgage broker. And this share has been driven in the main, not by advertising but by customer referrals.
Our customers want to use us.
But, just like we did after the Global Financial Crisis (GFC), our industry is entering a new phase of change.
As an industry, we continue to work with the customer at the heart of everything we do. BUT we can’t rest on our laurels - the industry must evolve.
Loan Market’s seven ideas for reform
That’s why Loan Market is putting forward these suggested seven reforms for industry evolution to keep the market competitive for all Australians.
Some are reiterations of customer outcomes proposed in the Combined Industry Forum (CIF) which formed in 2017 and of which Loan Market is a stakeholder, and some are initiated by Loan Market.
Either way, the reforms are considered and rooted in a desire to do better by our customer and increase competition, not to appease the agenda of the big four.
1. Adjustments to upfront commissions
The talk of changing remuneration structures occurs at a time when we as an industry are doing more work for our customers and on behalf of lenders than ever before.
The suggestion that a commission based system is flawed is misplaced - particularly when you look at the most recent review of the life insurance industry. They revealed that commission structure could work - with the right changes. This applies to our industry and is worth reviewing.
Fee for service reduces competition
Introducing a consumer paid-fee-for-service will weaken competition and lead to poorer customer outcomes and will mean fewer consumers will use a broker. In turn, that means fewer customers will get access to smaller lenders. Fewer brokers mean less pressure on banks to be competitive. It would be a massive win for the Big Four.
The existing commission structure fundamentally aligns the interests of consumers, brokers and lenders, keeping it competitive for all Australians.
Instead, these measured changes are suggested for standard residential loans;
- Commission payments should be based on funds actually used by the customer. In cases where a customer asks a broker for $700,000 to buy a home at auction, but successfully purchases the property for $600,000 the broker will only be paid a commission on the outstanding debt. This will remove any perception that brokers could be incentivised to put customers in a higher loan.
- A move to an industry standard upfront commission percentage across all lender products, meaning no matter which bank or product the broker suggests to a customer they would receive the same commission percentage. This would put to rest any misconception that brokers only put their customers into the higher paying products. This is similar to the successful changes that were made to the life insurance industry.
- And, Loan Market stands by the CIF’s call to ban bonus commissions. The removal of this will eliminate any financial incentive for the broker to show bias to a particular lender.
2. Trail commission key for ongoing customer service
Trail commission has been another feature of discussion in the Royal Commission. Trail is a deferred commission that is paid by the lender. Over time it has been attributed to the fee that a lender pays to look after a client, but initially, it was seen as a deferred upfront fee. It meant that a bank would pay less upfront than it would otherwise need to and could align payment more closely to the creation of value.
Under current arrangements, the commission brokers receive (in upfront trail) is about 20 per cent of the nett margin that is generated by a home loan over five years, the average life of a home loan. Trail helps spread this expense for a lender over the estimated life of the loan. If the trail were to be taken away, then upfront fees would likely increase, as has happened in jurisdictions that have no trail, generally where we see higher upfronts and we see a great instance of customer “churn”.
Trail commission enables the broker to provide ongoing service to the client including responding to general queries, discussing interest rate changes, making adjustments for a client’s changes in circumstances, explaining and reinforcing how cient’s can take advantage of the many complex features of a mortgage - all of which requires the broker and their staff to spend time with the client on an ongoing basis.
Instead of reacting to knee-jerk calls to ban trail we encourage policy makers to work with industry bodies, regulators and licensees to set standards for regular client reviews to ensure customers can get ongoing service from their broker for no additional cost to themselves.
In the future we see our brokers playing a critical role in assisting clients with budgeting and cash flow as part of the annual review which will help them to analyse their current spending patterns and put them in a position where they can pay down their loans in a more efficient manner. It’s this kind of service that can only be supplied if brokers have access to on ongoing service payment that trail commissions provide for.
3. Standardise "Clawbacks"
Questions have been raised about how brokers are incentivised to offer customers the best possible solution. Clawbacks encourage brokers to put a customer into the right loan or be negatively impacted in the short term by having the commission “clawed back”. Along with commission and trail, clawbacks create an environment that encourages brokers to operate with the customer at the heart of everything they do - if the product that the client takes is not the right one, and the client either stops paying the loan or goes somewhere else, then any commission is clawed back. Clawbacks mean that there is no one with a better incentive than the broker to ensure the client has a loan they can afford and that meets their objectives.
However, a clear standard should be set in the industry for clawbacks.
We need to strike the right balance between respecting the customer's right to switch, alter or pay down their loan while rewarding the work of the broker at the outset. The balance between encouraging post settlement service while not encouraging customer churn for no customer benefit.
There is a myriad of differing approaches by lenders to how clawbacks are calculate which is why we are calling for a clear industry standard for clawbacks.
4. Industry to set standards on income and expenditure assessment
What has been resoundingly clear throughout recent examination of the industry is that there will be a higher expectation on how brokers verify the financial situation and household expenses of customers.
Loan Market has been on this path for a while. We set and enforce the expectation that brokers are required to undertake a comprehensive analysis of the customers household expenditure breaking down the various categories of living expenses from food to entertainment and healthcare to schooling.
However, due to differing standards amongst lenders, there is no formal industry policy setting.
So that is why regulators, lenders and broker groups should set a common standard for assessment and presentation of income and expenditure details that must be communicated from the mortgage broker to the lender. This will set a clear expectation on the work that is required by a broker before it is presented to a lender.
One of the other concerns that have been raised in the various forums has been the prevalence of brokers, and potential customers, presenting inaccurate information to the lender on their circumstances which of course, the lender relies on to approve monies for a loan.
The issue of “non-disclosure” is also a critical element in the insurance industry where a duty of disclosure has been enshrined in law (The Insurance Contracts Act 1984). This applies to the applicant as well as any intermediary. We can draw parallels from this for the mortgage broking industry to ensure there is a legal responsibility and consequences of inaccurate disclosure or non-disclosure when applying for a loan.
Loan Market is recommending this be reviewed for its relevance to the mortgage industry.
5. Steps towards greater professionalism
Like many in our industry I have watched the commission unfold, as bank executives and industry peers took the stand, and while the revelations have been disappointing, they have been aired before in recent commissions, investigations, reports and inquiries. As these findings are published we have reviewed the detail and have seen where we can improve and as an industry we have begun the steps to get there.
The Combined Industry Forum (CIF) which formed in 2017 and of which Loan Market is a stakeholder is just one example of that active change happening now.
As an industry, I am confident we are moving forward and doing better for our customers.
Further steps we should take as an industry, include;
- The removal of “soft” dollar benefits to individual brokers by lenders. This would be done transparently through a ‘conflicts register’. This follows a similar model adopted by many professional industries, where any entertainment amount over $350 should be listed. This would be managed by the aggregator groups.
- All ongoing lender sponsorships of broker professional events should not be based on volume; this should be industry standard and accepted.
- And finally, the introduction of a “bad brokers’ registry list to remove brokers who act outside industry standards or commit fraudulent activity immediately from industry. This would be managed by the industry body.
6. Transparency across the sector
The Royal Commission also raised questions of ownership and whether customers meaningfully understood who they were dealing with and what this could mean for the advice they were about to receive. This applies particularly to Mortgage Brokers that are owned partly or fully owned by a bank.
As such, Loan Market believes that there should be greater disclosure by brokers and aggregators of their ownership structure.
Ownership should be communicated transparently. Our ownership is clearly stated on our website; we are a proudly Australian family-owned and led company in operation since 1994.
7. Broker obligations
It’s time for clarity around broker obligations as stated in the National Consumer Credit Protection Act (NCCP). The existing standard of “not unsuitable” has always been viewed as an odd turn of phrase. It is the wrong way to describe a broker’s obligations and has been wrong for a long time. We sell ourselves short by having such a low bar - particularly when as an industry we do so much better than being “not unsuitable”.
The CIF has defined what is a good customer outcome. Our belief is that the needs of the customer should be placed above the interests of everything else.
Exactly how the lawyers want to define that remains to be seen, and Loan Market will be prominent in discussions and debates on this wording and the framing of recommendations as we need to make sure the customer is at the core of everything we do and stand for.
The beginning of the broker evolution
It has been difficult to listen to many observers question the value and ethics of our industry. I know that many of those commentators would be comforted to know just how much this industry do care for customers and just how much we have at stake to get it right.
Our approach is clear - we need to listen to community concerns and come up with solutions that address the key issues expressed by those participating in the various commissions and enquiries that have occured over the last two years.
No doubt there will be some in the industry that think we should not change at all. I think it is a mistake for us to defend the status quo and resist calls to improve for our customers.
What we have learned from the financial planning industry is that if we don’t proactively take steps to change then we will have changed mandated for us. That change would be mandated by people who don’t understand how our industry works.
The seven reforms we have proposed will help ensure we can continue to improve customer outcomes. They will improve the confidence that the community have in our service proposition and they will ensure that those brokers - the vast majority - who genuinely care for their customers can invest with confidence in their business.
This is the beginning of the next phase of evolution in our industry. Loan Market will not be shying away from the challenge to do better. We have a plan, and we I’ll be talking about this plan over the coming days, weeks and months. At the centre of everything we do will be our customers and a desire to keep the mortgage market competitive for them.
About Sam White
Sam White is an entrepreneur based in Sydney, Australia.
Sam leads Loan Market Group which he founded in 1995. The Group has grown to operate in Australia, New Zealand and Indonesia and has business units in Loan Market mortgage broking, Wealth Market financial planning and Home Now connection services. Together, these businesses empower customers to make better financial decisions.
Loan Market Group offers finance and insurance professionals a model that breaks with tradition by providing freedom and genuine opportunities to make a difference. Sam’s philosophy is that long-term relationships are built on trust, mutual respect and founded on honesty when dealing with our lenders, franchisees and customers alike. Our advice is based on our client’s best interest, not the interest rate.
Sam is also passionate about supporting and investing in startups and early stage ventures in the finance and real estate sectors. He is on the board of a number of such companies.