The government seems to be backing the removal of trail, but is showing signs of concern in terms of the removal of up front commission, which is typically 65bps, and the negative competitive impact it will certainly have.
The customer will ultimately pay for advice however it is charged, and lenders will always have a customer acquisition cost.
Lenders acquisition costs vary between branch, telephone, broker and online, but they are all acquisition costs that have to be passed on and typically are built into product pricing.
And yet the commission’s recommendations include brokers charging for advice and lenders doing the same if the customer comes direct.
The Australian mortgage market is under regulated, and unlike the UK, there is no obligation to recommend the most suitable mortgage for the customer, instead just ensure the mortgage is not unsuitable.
Removing procuration fees for brokers would be misguided and lazy ‘regulation’ that in no way improves customer outcomes.
The fact is advice needs to be provided whether a broker charges a fee, gets paid by the lender, or a combination of both.
So what exactly is the royal commission recommending in terms of meaningful regulation of advice? It doesn’t exist now and it won’t exist under their recommendations to remove commissions.
Who will pay?
I believe brokers are already acting in the best interest of the customer, however adequate regulation would mean mitigating the risk of poor advice not purely punishing such advice.
If the government and regulator are genuinely concerned about the customer, they would encourage competition, and in fact want to see competition increase, but then deliver the appropriate level of regulation to ensure great quality of advice is provided as is the case in the UK. Who then would pay for that if brokers struggle to make a living?
Removing all broker fees will just reduce choice and competition, and favour the four leading banks whose dominant market position needs to be challenged, not handed to them on a plate.
Tell me how that is in the interest of the customer?
In Australia, as in the UK, new broker and bank innovators are coming to market delivering even more choice in how the customer can research, receive advice, and apply using new developments in technology.
Its early days for some of these models, but like a new lender coming to market, they aim to deliver more options for customers, who understandably would not expect to pay a fee for more tech driven solutions compared to traditional face to face advice.
The innovation they bring will transfer and bring benefits to more traditional advice models to increase speed, ease, and convenience for the customer.
However the unintended consequences of all lender fees being removed are to stifle such innovation, as ultimately everybody has to earn a living, and if you remove the opportunity to do that you remove choices, competition and any motivation to innovate.
Supporting smaller lenders
Smaller regional banks deliver competitive pressure to the big four banks in terms of price, service and underwriting flexibility, and these banks are reliant on brokers for their business.
These smaller banks will struggle to offer such meaningful competition if the intermediary market share falls back from the current level of 59%, which it would certainly do under these recommendations.
The government should be applauded for authorising a reduction in the capital requirements in 2017, as up to that point only one non-mutual start-up had received a banking licence in Australia in more than 100 years.
Last month Volt Bank was the first to take advantage of the relaxation in capital adequacy, and launched with a compelling tech led proposition for customers driving even more competitive pressure in the market.
What incentive is there for more of these banks to come to market, as was the government’s intention, if their supply to distribution is severely restricted.
Poor protection outcomes
In the UK when you take out a mortgage, protection advice for mortgage customers is absolutely crucial so that they fully understand the risks and the range of solutions available to mitigate those risks.
A more constructive review of mortgage renumeration and the advice process would surely include considering how brokers could play a far greater role in educating customers about the risks of losing their home, and advise them on the appropriate solutions such life assurance, income protection etc.
Australia has arguably the best pension and superannuation scheme in the world, however it does not provide sufficient protection in terms of insurance tailored to customers’ individual needs.
Reliance on the superannuation scheme combined with commissions being significantly reduced on protection by the government, and exceptionally high qualification standards required to provide advice, has led to it becoming financially unviable to deliver the level and quality of protection advice required.
Therefore, it is no surprise that Australia is one of the most uninsured developed countries in the world.
Not consumer focused
In summary changes to commission do not improve customer outcomes unless those commissions show product bias which they do not, with the cost of distribution quite understandably built into the pricing of all businesses in every sector.
In my opinion the Royal Commission has not focused sufficiently on the consumer, and the great additional potential brokers have working closely with new and existing lenders to provide more choice, even greater value for money, and an outstanding customer outcome.