Deferred Upfront Commission Model a Possible Solution?

The Deferred Upfront Payment Model of Broker Commissions Is Gaining Momentum

Zak Brakey discussing finance with Jesse in the Vie Financial officeWith the future remuneration model remaining unknown, many industry experts have been sharing valuable insights and predictions.

As one banking executive stated, the sustainability of broker remuneration could be negatively affected by the Royal Commission’s recommended changes.

Recently, ME bank hosted a panel in Sydney to discuss the future of brokers in the home finance industry.

Several respected industry experts attended to share their thoughts on the potential impact of the recommended changes.

In this article, we share opinions and the implications certain actions could have on the mortgage broking industry.

Why Is the Future of Broking a Top Discussion?

For anyone who may not have heard about the Royal Commission, Commissioner Kenneth Hayne released a report with recommendations regarding broker remuneration after his investigation of reported misconduct in the banking industry.

Although the original complaints, as well as the findings, had more to do with bankers rather than brokers, the suggested changes that directly affect brokers the most are in regards to their remuneration structure.

What Do Industry Experts Think?

The journalist who hosted the Sydney panel asked the experts what they thought about the recommended changes and the comments made by both the Labor Party and the coalition government.

Jamie McPhee, CEO of ME Bank, emphasised that the Royal Commission was ordered because of misconduct by the banks.  Mr McPhee added that the Royal Commission recommendations would hurt brokers more than bankers, and if implemented as suggested would give more power back to the big four banks.

As someone who strongly supports brokers, he believes that a good remuneration structure is critical for maintaining competition in the finance industry.

Industry Sustainability

Mr McPhee said that ME Bank would not survive without brokers.  According to him, about 70 per cent of the bank’s new customers currently come from the broker channel.

He hopes people will realise and appreciate the importance of a remuneration structure that will sustain what the mortgage broker industry is today, rather than what it was in the past.

Is There a Compromise?

Mr McPhee said that a deferred upfront model would give a broker part of the fee at the time of service, and part of the fee in two separate intervals, one at two years and one at four years, provided the loan is properly upheld by the borrower.

To support the argument for a deferred upfront model, Mr McPhee pointed out that most lenders currently pay about 65 basis points upfront commission.  After that, there is a trail of around 15 basis points paid per year based on the outstanding loan amount.

Mr McPhee suggested that lenders could instead pay a fee of 125 basis points.  For the average four-year life of a mortgage with his suggested deferred upfront model, a lender would pay 65 basis points initially, followed by a payment of 30 points two years later.

At the four-year mark, the lender would pay the remaining 30 basis points.  Mr McPhee said that a deferred upfront model was not inconsistent with the Banking Executive Accountability Regime and its suggested bonus structure.

As Mr McPhee concluded his thoughts, he added that he did not believe the current remuneration structure was defunct.  However, he acknowledged the authority of the government’s Royal Commission and said that his suggestion would be a workable alternative if the current remuneration structure is politically unacceptable.

He encouraged feedback and collaboration among industry leaders to find a solution that does not harm the broker channel.

Extended Service Provisions

Another mortgage industry expert, Katrina Rowlands, addressed the panel with her thoughts.  She stated that trail remuneration allowed her to better serve clients.  After settlement, she was still able to provide them with ongoing services and personalised support that banks did not offer everyday home loan customers.

One important point that Ms Rowlands made was how home buyers often need help maintaining their finances and keeping their homes when times are hard.  Currently, they turn to brokers for help, however, the suggested change to an upfront fee would mean that help would only be available if the customer was able and prepared to pay for it.

Why Remove the Trail?

Ms Rowlands shared a story about a recent client of hers, a widow who wanted to have her husband’s name removed from the title of her house.  Referring to that scenario, she asked who would have helped her client do this if she was not paid trail to look after her?

Ms Rowlands emphasised that the trail setup maximised her client care abilities.  Ms Rowlands asked the panel why would the Royal Commission suggest abolishing trail if brokers, consumers, clients and even banks do not want it removed?

What Will the Future Be Like for Brokers?

In recent months, the debate about broker remuneration has become heated.  

While both political parties have provided a response regarding the suggestions made by the Royal Commission, it is important that any changes to broker remuneration be very carefully considered before being legislated, as the outcomes could seriously impact competition within the finance industry, interest rates, borrowers costs and national house values.

For now, Australians can still enjoy the comprehensive service that brokers offer.

If you are considering refinancing or purchasing a home within the next six to twelve months?  Our team is here to help you any way we can.