The recent introduction of quality to the remuneration arrangements between lenders and mortgage brokers is more than just a commission change. Matt Lawler believes it reflects a new era for the industry
In this era, we will see a move away from the "volume frenzy" approach that averages everyone who writes a loan as the same; to an era which focuses on return on equity (ROE). That is, an era where there is a clear distinction between those that are outstanding in their quality at one extreme, to those that deliberately look to exploit loopholes, shortcut their responsibilities or even involve themselves in criminal activities at the other extreme.
As the industry matures we need to be more deliberate about the way we "Cheer the champions and rid us of the rogues".
In other words, for the brokers that lead the industry and do the right thing, our rewards and recognition should inspire others to be just like them. Alternatively, the financial and reputational impositions we apply to those who don't meet the minimum standards we expect, should serve to discourage them from remaining in or even entering the industry in the first place.
Of course it is important to remember there is a vast array of quality that lies between these two ends of the spectrum which acts as a continuum and allows serious participants to evolve over time.
As a relatively new entrant to the industry I have seen that years of layering extra compliance requirements to keep out the lowest common denominator has resulted in a complicated, cumbersome and paper intensive process for taking on new clients. The approach to date from lenders (including ourselves) in response to these requirements has developed an environment which appears to work against the very person it is designed to protect i.e. the consumer.
So how do we solve this?
Whilst I am not advocating this is an easy issue to fix, this new era gives us a great opportunity to create a paradigm shift. We should look to empower brokers with a proven track record with more responsibility and differentiate the requirements for brokers based on past performance, quality, experience, internal processes and so on. What follows responsibility then is accountability in that if someone abuses this additional freedom there should be consequences. Brokers should be held liable both financially and professionally to the extent that it would ensure there is sufficient motivation to do the right thing, and sufficient penalties for doing the wrong thing.
The mortgage broker continuum
Mortgage brokers in the future are likely to fall into four main categories: industry leaders, high potentials, developers and the rogues. The industry, including regulators, aggregators, lenders and service providers, should now start to formalise services, reward and recognition programs, and importantly our standards and consequences to reflect this shift. Let's have a look at each segment starting with the best.
Industry Leaders
The top 35% are the industry leaders and they should be recognised and rewarded accordingly. They are the brokers who submit well supported files for establishment, monitor their clients regularly, undertake professional development, and do the right thing by their clients such as making the application process easy for them and easy for the lender to process. Their experience allows them to be easy to deal with and reduces costs on the lender's behalf. Their track record of previous business will give lenders a higher level of confidence in the long-term quality of their deals.
It is likely that with experience and a higher level of education and qualifications that this segment will be recognised with a higher level of accreditation similar to a Certified Practising Accountant (CPA) or a Certified Financial Planner (CFP). Over time, the public will recognise this. Lenders will acknowledge the industry leaders by releasing a higher margin to them under the new commission structures and streamline their processes and business requirements.
High potentials
The next 35% are the high potentials. Whilst not at the level of the top segment they are developing with experience, regularly invest in their own education and are eager to learn new skills. This group is already exhibiting the traits required to become a champion and through further experience, coaching and development they will advance their position. As an industry, it is the job of aggregators and lenders to support them in becoming better business owners and advisers to their clients.
Also, the industry will develop higher levels of accreditation that the high potentials will work towards achieving. Lenders will start to reward them above the average as their track record proves that they are the industry leaders of the future.
Developers
The next 20% are generally new entrants to the industry with limited experience but committed to learning their trade in order to build a client base and business that provides regular income. The industry needs to invest heavily into this segment to build the right skills, ethics and professionalism to ensure they do the right thing by their clients, their aggregator and their lender partners. Those that respond to coaching should be encouraged to advance though we should deal quickly with those that are unlikely to make it or are unwilling to do the work. The movement for this segment is "up or out".
A simple way for the industry to consider this segment is as apprentices. They are new entrants and require ongoing accreditation before their status is changed to that of the more experienced, quality brokers. Lenders will recognise them at the lower end of the remuneration scale until their skills and track record demonstrate that they are valuable and possible high potentials for the future.
Rogues
The remaining 10% or so are the rogues and have this tag because they tend to be the ones that are part-timers, lazy, cut corners, turn a blind eye to professional standards or simply don't do the right thing. They are labelled rogues because they are stopping the industry from realising its full potential and they are a "drag" on our efforts to lift the profile and reputation of mortgage brokers in the public arena.
This segment will fall away each year as standards increase and clients expect more from brokers. It is important to recognise those who do the right thing acting in their client's best interest, and make an example of those who fail to do so. It may sound harsh but we need to move on this segment quickly to ensure the industry can enhance its reputation.
At the extreme, there are those who do deliberately break the law. For too long, the industry has not pursued proven fraudsters and criminals legally for fear of lengthy legal proceedings. As a bare minimum, the fraud must be reported to one of the industry bodies, such as the MFAA, who are increasingly strengthening their resolve and capability in exiting those that bring the industry's name into disrepute.
In future brokers should be liable to clients, aggregators or lenders if they break the law and any party realises a loss.
The opportunity
We have a great opportunity now to create this new and improved environment. However, we must not wait for regulation as this will only represent the minimum benchmark required before you break the law, which is hardly a confidence builder for our clients. Aggregators can start now through their own high standards and requirements, lenders can implement this through their remuneration structures and accreditation standards, whilst industry associations such as the MFAA and FBAA can establish a common set of standards for us to move from being referred to as an "industry" to being respected as a "profession".
Averaging is on the way out and quality will be the new differentiator for brokers in the future. Let's run with it!
Matt Lawler is regional general manager of NAB Broker responsible for products provided by NAB, Homeside and MLC. He has more than 20 years experience in the Financial Services industry having managed MLC's Financial Planning groups of Garvan, Godfrey Pembroke, Apogee and NAB Financial Planning (approximately 1,500 Financial Planners) through the introduction of regulation in the form of the Financial Services Reform Act (FSRA) in his previous role. After spending several years on industry committees for the FPA including being a key architect of the FPA's Conflict of Interest Policy, Matt recently resigned from the FPA Board after 2 years and has now taken up a Board position on the MFAA.
These views are personal views based on Matt's experience and do not reflect the views or policy of the MFAA Board.
