The Federal Government’s recent decision to modify Royal Commissioner Hayne’s recommendation to move to a ‘user pay’ model and revoke trail commissions has provided welcome relief for the broker industry.
The removal of trail commission has long been considered a worst-case scenario for brokers, with potentially wider repercussions in terms of increased churn for lenders and higher interest rates down the line for borrowers. And, while the legitimacy of brokers receiving trail commission has been often questioned, critics should consider the reasoning behind this: the economics of banking show that banks don’t start to receive a return on their loan until the third of fourth year post settlement, and so it’s in their best interests to encourage brokers to secure longer loan tenure. Trail commission clearly helps brokers and lenders to deliver on this objective.
Of course, there’s always a counterargument - what about the consumer’s right to swap loans as they see fit? Doesn’t trail commission contradict this philosophy? With up to 80 per cent of home loans in Australia variable rather than fixed, most borrowers do already have the flexibility to seek out a better deal.
However, we need to remember that shopping for a new home loan is not as simple as changing a utility provider. There are already a number of associated costs such as valuation fees, legal fees and mortgage transfer fees that make securing or transferring a home loan an expensive process for the consumer. Clearly, replacing trail commission with an upfront broker fee will be an unattractive proposition for many borrowers, and potentially drive them directly to the lenders. However, this too could be counter-productive considering the level of competition that brokers bring to the market.
A data driven future
Change is undoubtedly on the horizon. It is proposed that the broker’s duty evolves from ensuring a loanis not unsuitable for the borrower to ensuring the loan is in the best interests of the borrower. It’s a subtle change in wording but the implications for the industry are more significant as brokers will need to acquire a working understanding of their borrower’s balance sheet.
If this proposition is adopted, the level of knowledge required may start to influence a drive away from diversified broker models and ‘one stop shops’ towards deeper specialisations. Access to data will therefore become more critical. The good news is there are a number of resources that can help brokers in this regard. Tools and analytics such as CoreLogic’s research platform show property growth trajectory and highlight risky postcodes. These can help to inform brokers’ assessments of their clients’ prospective purchases. Brokers will also benefit from open banking, which will enhance the digital transmission of data and make it quicker and easier for brokers to do their due diligence and satisfy the ‘best interest’ standard.
Although accountabilities may change in future, I believe brokers can be confident their industry will continue to thrive.
While parts of the homeloan application process had become digitised in recent years, the constant regulatory change will ensure the path to home ownership remains complex. Consumers unfamiliar with the mortgage approval process – especially in light of tighter lending criteria post Royal Commission – are still in a vulnerable position when it comes to buying a property, most likely the biggest financial decision they will ever make. This provides a golden opportunity for brokers to demonstrate their true value as a trusted adviser.
Of course, ensuring the sustainability of the industry always comes back to delivering an exceptional customer experience at every step of the way – continuing to veer away from the historically transactional nature of the relationship towards building a long term partnership over the course of a home loan and beyond. Whatever regulatory change takes place in future, the importance of doing this will never become redundant.