If a flat fee for service is the answer, what is the question?
This week at the Royal Commission the CEO of Commonwealth Bank, Matt Comyn, has endeavoured to portray himself as Luke Skywalker, champion of good pushing against the tide of evil that is all around him. He told the Commission that he fought the evil former CEO, the flawed former chairman of the CBA Board and he “stood up” for consumers against lazy brokers.
I am a mortgage broker, so I didn’t much like what Matt Comyn had to say. It quickly became apparent that consumers didn’t much like what he was saying either judging by the feedback I was getting on social media from loyal clients and distant acquaintances alike.
So Matt Comyn may be more Darth Vader than saviour of the galaxy. And that makes brokers like me rebel fighters in the Home Loan Wars.
In his testimony, Matt Comyn, told the Commission how he had long championed a flat fee for service (paid by consumers) within the bank in the interests of advancing good consumer outcomes. Comyn explained that CBA were so keen on a consumer pays, flat fee for service model for home loans that he not only advocated for it with ASIC and in the Sedgwick Review but the bank was committed to moving to this model and was only days away from announcing this.
That was until he realised that CBA was going to be standing all by itself in the middle of the dancefloor, dancing alone. It seemed not one other lender was that keen on CBA’s choice of music. So CBA tried to slip off the dance floor, hoping that no-one noticed. And no-one did at the time. But the Royal Commission was showing interest on Monday and Matt Comyn is enjoying the warm inner glow that come from being the centre of attention and having an audience liking what he is selling.
It is clear now that the flat fee for service model is a solution the Commission is keen on. It is also clear that brokers (and the representatives) are not being invited to give evidence at the Commission. The Commission may make recommendations that adversely affect mortgage broking but it does not feel brokers have anything valuable to contribute to the discussion.
The consumer pay, flat fee for service model that has seduced the Commission is one used in the Netherlands. At some level that is reassuring. Australians love the Dutch. Pieter van den Hoogenband might have snatched gold medals out of Ian Thorpe’s hands at the Sydney Olympics but the Dutch and the Aussies are cut from the same cloth and if we were going to get beaten in sport it is better to be beaten by the Dutch than the Poms or Kiwis.
But I don’t think Matt Comyn was thinking about any of this on Monday. He was there to prosecute CBA’s agenda. Which (legitimately) is to generate long term value for shareholders, and what better way to do this than to promote changes to the broking industry that advance the bank’s interest while appearing to be doing so for altruistic reasons.
What CBA proposed was a move away from bank paid commissions to a consumer paid fee or around $2000 per loan. That fee would be payable by consumers on all loans, whether the loan is arranged via a broker or direct with the lender.
If the consumer has to pay the fee regardless of how the loan is organised then there is a level playing field for brokers and banks. And this model therefore solves the purported problem of brokers recommending loans that are larger than what consumers need. That is the strength of the model. That is what has seduced the Commission.
What seduced Comm Bank was something more. If broker commissions (which are paid by the banks) are removed, then CBA estimates it will save over $197m over 5 years. On top of this, it stands to receive millions of dollars in fees on the home loans it organises directly for customers. Cutting costs and increasing revenue looks good for shareholders and can’t hurt executive bonuses.
But that means Consumers will now be forced to pay a significant fee to get a home loan. That is probably not a great selling point for the model. Comyn was keen to point out that with all the savings the bank would make from not paying broker commissions it would be able to pass on some of these savings on to consumers through cheaper rates.
Now this is where TRUST comes in. We have to trust that the banks will do the right thing. And lets face it, the CBA doesn’t have a lot of credit in the TRUST bank right now. And when I say “not a lot” do I mean “none”? Well close enough.
The big 4 banks reaped super profits from home lending prior to mortgage brokers coming along. It was broker and the rise of the non-major lenders that saw consumers get a better deal on their home loans. The big 4 banks have reluctantly accepted cuts in the margin at the risk of losing significant market share. How well did brokers advocate for clients? The broker share of home loans written has increased from 25% in 2003 to 55% in 2018.
What else can consumers expect? Well in the Netherlands the flat fee model is not quite a flat fee model. There are fees on top of the standard fee for “complex” transactions like home loans for self employed borrowers, refinances and people going through a divorce. So some of the groups of borrowers who find it most difficult to access funds, will now have to bare higher fees to get a loan. That only sounds like a good consumer outcome if you are the CEO of CBA.
A flat fee is also a great impost for borrowers seeking relatively smaller loans. What about a client after a $20,000-$100,000? Are they expected to pay a full fee? Or is the broker meant to work for virtually free? Or does the client have to rely on dealing directly with banks (rather than having access to broking services) because they can’t afford or justify the fee.
A flat fee is relatively less affordable for lower income borrowers. That doesn’t sound like a good consumer outcome. Is that an outcome consumer groups or a government of any persuasion can support?
Another major concern is that a flat fee will be payable by a consumer any time they seek to refinance their home loan. That adds a significant cost/barrier to moving between lenders. In other words, it acts to metaphorically handcuff a client to a lender. That is a handy outcome if you are the leading home loan provider in Australia. No prizes for guessing who that might be!
In 2011 the (Labour) Federal Government banned lenders charging exit fees on home loans so consumers could easily and cheaply exit unfavourable loan contracts and move to obtain a better deal. A flat fee for service model introduces an exit fee in another guise. It will serve to diminish competition in the home loan market and it will allow lenders to grow their profit margins on lending because moving lenders will be more expensive.
CBA’s view was that the flat fee for service paid by consumers ought to be around the same level as the price for financial advice. The figures suggested were $2000-$2500.
The financial planners I know all charge more than $3,000 for a standard statement of advice so he is short changing brokers to start with. At the same time financial planners earn commissions for selling life insurance, income protection etc So a client that gets financial planning advice plus insurance could earn the planner significantly more than the figure CBA wants the RC to be focusing on.
Call me sceptical but $2,000 also seems remarkably akin to the type of fee that consumers pay in the Netherlands…except that brokers there are earning 2000 Eur not measly Australian dollars.
Exchange rates aside, for a very standard home loan of $400,000, a $2,000 flat fee would represent around 42% of what brokers would currently earn on a loan that was in place for 4 years . As the loan size increases the fall in revenue is only magnified.
The CBA Chief Executive was keen to mention that CBA had plans to help brokers with the transition to the new model. What he failed to mention was that the new model would make broking unviable for thousands of brokers, both big and small, skilled or just starting out. So broker attrition will be significant. It is likely to mean thousands of brokers out of business and with that thousands of employees also looking for new jobs.
If broker numbers fall dramatically that will hand market share and power back to the Big 4 as they have established distribution networks (branches) unlike the majority of other lenders. The result will be an increase in lending margins and consumers paying relatively more interest on a home loan than if strong competition existed in the market place.
I did not hear the Commission ask about the negatives of the flat fee model or deeply probe Matt Comyn about any of this. That says a lot about its thinking at the present time. There was no discussion of the impact on service delivery both during the loan application process and post settlement if broker remuneration is savagely cut. Comsumers come to broker because banks aren’t delivering the service they want. CBA’s answer is to stop brokers from being able to afford to deliver service.
So the flat fee system is not as lustrous as it seems at first glance and there are serious questions marks over how it will be a win for consumers. It is definitely a big loss for brokers.
Meanwhile a Star Wars devotee client pointed out to me that Darth Vader serves Emperor Palpatine and the Galactic Empire before saving his son, Luke Skywalker, and killing the Emperor. Time will tell if Matt Comyn is more Luke Skywalker or Darth Vader in the meantime perhaps CBA Chair Catherine Livingston ought to be very nervous.
But I am more concerned that consumers will be the biggest victims in the Home Loan Wars. The rebels (mortgage brokers) have been marginalised and the Galactic Empire is prosecuting its own agenda. Truth is the first casualty in war.