Brokers fear being undercut by banks

Four out of five brokers say their business could be at risk amid growing suspicion of radical changes by the banks

82.8% of brokers say their business would be 'significantly impacted' if the banks undercut broker interest rates. 

The finding comes from broker comparison site HashChing, which surveyed 440 brokers on competition issues, the bank levy and the Federal Budget’s efforts to improve housing affordability.

Fear of banks undercutting brokers has grown amid reports of individual branches undercutting brokers, with some banks restricting investor lending to branches and existing clients only. However, the fear of banks undercutting brokers is intricately connected to changes around commissions.  

Following the publication of the Sedgwick Review, which recommended broker commissions be decoupled from loan size by 2020, many in the industry have expected imminent changes to commissions by the big banks. Committing to all of Sedgwick’s recommendations, Commonwealth Bank CEO Ian Narev said that "We will implement many of the recommendations by 1 July 2017 and will have all changes in place by the following financial year.”

One theory is that the banks would balance a commission change by offering a particularly low-rate product, direct and through brokers, which brokers would struggle to boycott, given the conflict of interest this would imply.  

Investment bank UBS made similar observations in a critical report on broker commissions:” If mortgage brokers refuse to deal with one or more of the banks on the basis that its commission rates are too low this will reinforce the inherent conflict of interest highlighted by ASIC.”

UBS claim that brokers add 16bp to the cost of every mortgage in Australia and suggested the savings would be passed on: “we would expect any reduction in mortgage broker commissions to eventually be competed away by the banks. This is beneficial for customers and should help offset the additional repricing expected by the banks as they adopt the new Bank Levy from 1st July.”

“We expect the banks to negotiate materially lower fee-for-service mortgage commissions in coming months”

UBS' report has been criticised by the MFAA, FBAA and others, who claim UBS overestimated the value of trail commission in their calculations. At the time of writing, no bank has actually announced changes to broker commission and many have stated their commitment to the channel.