Anja Pannek, Sam White say opinion columns are inaccurate, misleading
LMG, Australia’s largest broker aggregator, and the MFAA, the biggest peak body for mortgage brokers, have defended brokers following the publication of two AFR articles which criticise brokers’ remuneration and question whether they’re providing clients’ value for money.
Sam White (pictured above left), executive chairman of LMG, said the opinion articles written by Australian Financial Review columnist Karen Maley, contained a number of factual inaccuracies and he was frustrated that misconceptions about how brokers operated that arose during the Hayne royal commission continued to arise.
“I thought we'd communicated better as an industry with stakeholders and all of these myths that were around during the royal commission were ones that we’d dealt with, so I was surprised to see that in a publication with such a good reputation as the AFR, that there’s still those misconceptions,” White said.
“It made me realise we need to do more to keep educating the broader community … there was a number of comments that were made that were factually inaccurate and it was disappointing to read.”
MFAA CEO Anja Pannek (pictured above right) said the opinion columns were “grossly inaccurate and misrepresents the work of brokers, how they are remunerated and regulated”.
“Mortgage brokers have been disruptors in the lending market, and this has been good for consumers through choice and competition and the lower prices this brings,” Pannek said.
“Brokers have also enabled smaller lenders to compete with the majors who hold majority market share.
“We have seen some of the major banks talk recently about their mortgage margins being compressed. It's interesting we aren’t hearing a ‘cry poor’ message and criticism around the work that brokers do from non-major lenders.
“Mortgage broking is about trust, expertise and commitment to helping clients and always putting the clients’ best interests first.”
The first column, which appeared on the AFR website on Saturday, featured the headline “Inside the unstoppable rise of Australia’s mortgage brokers, with a subheading that read: “They’re wealthy, brash and eating the banks’ lunch. Meet the millionaire mortgage brokers taking on the major lenders – and, for now – winning.”
Maley asked readers if they were about to buy a million-dollar home would they be prepared to pay about $14,000 to a mortgage broker for help tracking down the best deal.
“Many people would baulk at the prospect of forking out such a large amount for the dubious pleasure of an $800,000 home loan,” the AFR opinion piece stated.
“But the opaque nature of the upfront and trail commissions paid to brokers – combined with the fact that they’re paid by the banks rather than the actual borrowers – mean that few borrowers bother to think about how much their broker stands to earn.”
Maley went on to describe the large rise in commissions that brokers were earning due to rising property prices with Sydney prices climbing 160% in 15 years which had “resulted in a huge boost to the income of mortgage brokers”.
“As house prices climb and the size of mortgages increases, the greater the fees that flow to mortgage brokers, even if the amount of work they do on each loan remains essentially the same,” Maley wrote.
Maley highlighted that the gross average annual earnings of brokers (quoting the MFAA’s Industry Intelligence Service 16th Edition Report) was $181,199, more than double the median salary of a full-time worker.
But she said top mortgage brokers earnt much more, quoting MPA’s Top 100 Brokers 2023 report showing that the average written by the country’s leading mortgage brokers was $175 million.
“Based on the standard broker commission rates, this suggests the average income of mortgage brokers in the Top 100 is close to $2 million, and that the top mortgage brokerage operations are earning between $5 million and $6 million,” said Maley.
She said the billions of dollars flowing to the mortgage broking industry was “playing havoc with the profits of the country’s big banks” and their net interest margins had dropped from 3.5% in 2000 to less than 2%.
In her column, Maley said the balance of power had shifted towards mortgage brokers, and although some banks were fighting back by launching direct to consumer digital loans, “this would be a slow burn”.
“Successful mortgage brokers are pocketing much more money than the banks’ own top home lenders, who earn between $300,000 and $350,000 a year”.
In Maley’s second column about brokers, which was published on Sunday, May 26, and featured the headline “Banks gear up to take back mortgage market from brokers”, the columnist writes about banks pinning their hopes on older, more savvy customers who were comfortable with signing up to a home loan online, offering lower rates than if they visited a branch or used a broker.
“The problem is that a large chunk of the surplus profits the banks previously enjoyed on their home loan books is now flowing to the mortgage broking industry,” wrote Maley.
She said the average Sydney mortgage broker earned about $400,000 in upfront fees each and a total of $670,500 a year when trail commissions were included.
“Home buyers – those who go through the banks’ branch networks and those who use a broker – are paying more than they should on their mortgages because banks factor the commissions into the pricing of their home loans.”
Maley also wrote that because upfront commissions were much larger than trail commissions, broker had an incentive to encourage clients to sell their existing home and upgrade to new and more expensive properties, saddling clients with larger mortgages and higher home loan repayments.
“Another conflict of interest arises because some home lenders will occasionally lift the level of upfront and trail commissions paid to mortgage brokers in a bid to win a larger slice of new home loans.
“Even though mortgage brokers are subject to a ‘best interest’ duty, it isn’t difficult for them to justify channelling more loans to lenders offering higher commissions by arguing that that bank also has, say, a more lenient credit policy.”
Maley said one way to mitigate conflicts of interest was to require mortgage brokers to be more transparent about the commissions they earned.
The columnist also highlighted the final report of the Hayne royal commission which recommended changing the structure so that the borrower, not the lender, paid the brokers. It also said trail commissions should be prohibited within a period of 12 to 18 months.
These recommendations were not adopted by the Morrison government, but BID was introduced.
Sam White responds to AFR columns
White, is the executive chairman of LMG, Australasia’s largest broker aggregator, with around 5,000 broker members in Australia and 1,200 brokers in New Zealand.
Speaking to MPA, White refuted the claims made about brokers in Maley’s AFR articles.
Fee disclosures
“The first thing is the fact that brokers don’t disclose fees [to customers] – that is incorrect. You have to disclose fees and brokers have been disclosing those for some time,” White said.
“We have a game plan, a statement of advice some people call it where you need to provide a comparison for a number of different lenders. Also you need to be able to show what those commission rates are.”
Bests interests duty
White also disagreed with the comment that brokers don’t care about BID and just went wherever the commission was, saying this was “frustrating to read”.
“We’ve done a lot of work on best interests duty. BID’s been good for our industry – we support it. You do need to give comparisons and make sure clients are properly informed and they do feel informed in the process.
“There’s a broad range of lenders now that brokers represent. The upfront fee at 0.65% is pretty much industry standard, there’s very few that aren’t 0.65%.”
White said all the indications he had seen was that brokers were doing the right thing when it came to BID.
The proof of the pudding in terms of how satisfied customers were with brokers was that broker market share had risen.
“That’s on the back of very little advertising – it’s all word of mouth, clients have referred their friends. They wouldn't do that if they were unhappy.
“Net promoter scores are very high, we do them regularly and they’re consistently above 90. The third thing is that complaints to AFCA are incredibly low – 0.3% of FY23 complaints were about brokers.
“There is no systemic evidence that I’m seeing that shows that anything that was said in that article is correct and none of those points were substantiated or sources given for those statements that were made in the article, which I felt was disappointing.”
Broker earnings
White said the concept that brokers earn on average $400,000 a year in upfront commissions was misleading. This was not the broker’s take home salary, because expenses hadn’t been factored in.
“Even before you get into that argument, to do $400,000 in upfronts you would need to do about $66 million in volume. There about 4.5% of our brokers around the country that do over $66 million in volume per year and we’re the biggest group so you can say that’s reasonably representative of the market.
“It’s a long way from saying the average is $400,000 when only 4.5% do enough volume that would generate $400,000.”
White said there were a lot of costs as well. “If you’re doing $66 million, you've probably got support staff, you’ve probably got rent, you’ve definitely got business expenses and I thought it was misleading to point out that was someone's earnings – that is business revenue and the business revenue has costs.”
Convincing clients to upgrade homes
White said he had never seen any evidence of brokers encouraging clients to sell their homes and upgrade to new properties to boost their upfront commissions.
He said it didn’t make sense that a broker could, for the sake of an upfront commission which on an $800,000 mortgage might be nearly $5,000, convince a mortgage holder to sell their house, pay agent fees, stamp duty and relocation costs.
“I just find that incredulous,” White said.
Banks paying higher broker commissions
White said he was surprised to read the suggestion that banks were offering brokers higher commissions to generate more business.
“I haven’t seen banks offer differential commission structures for a long time. I haven’t see that maybe for a decade.”
Brokers costing customers more
White also disagreed with the premise that by using brokers customers paid more for their loans.
“We’ve saved customers money, we’ve brought competition, we’ve halved net interest margin which Maley acknowledges in the article.”
White said the argument was that because banks were paying brokers money they couldn’t pass this savings onto the consumer.
“The assumption that you'd need to make is that if banks didn't pay brokers they’d pass on those savings to the customer. That’s a big assumption – banks don’t even pass on RBA rate cuts, let alone broker rate cuts.
“How would you have any confidence that the consumer would win by weakening brokers, when all the evidence points to brokers being the champions of the customer and through that have actually reduced the amount of interest that Australians pay.
“That’s the reason why some banks want to weaken the broker channel.”
Broker fee model
A model whereby customers would pay brokers directly for their service had been discussed during the royal commission, said White, but there was no evidence of any benefits.
“If you’re charging fees to customers, the reality is mortgage broking becomes a domain for the rich. If you can’t afford to pay the fee, then you don’t get the advice … the people who need the advice and structure are the ones that can least afford it.”
White said this is what had occurred with the fee for service model for financial planners.
“I think it’s sad state of affairs if the mortgage broking industry goes down that path and charges the fee and the very people that need it the most are unable to afford the service.”
Brokers need to promote the industry
White said the AFR articles showed that brokers need to keep focusing on customers and driving positive outcomes.
“We do need as industry to keep promoting the benefits and the advantages and the opportunities that we've brought to Australians and keep focusing on helping our customers.
“Our industry, and I’m part of that, needs to do a better job at communicating to stakeholders and making sure that people who are writing these stories understand both sides.”
MFAA’s response to AFR columns
MFAA CEO Anja Pannek also refuted claims made in the AFR opinion pieces about broker commissions, the banks’ reliance on the broker channel, and BID.
Broker commissions not the same as salaries
Pannek said the claim that brokers were, on the whole, earning incomes in excess of $500,000 was incorrect.
“Broker remuneration is also heavily regulated – bank branch staff pay isn’t,” Pannek said.
“Brokers are transparent with their clients about what they will get in commission, again unlike bank branch staff. Brokers are compensated for the value they create for the lender. Let’s not forget lenders retain the vast majority of the profit from any home loan.”
Pannek said as in any industry there was a spectrum of income and profitability across brokers.
“There are brokers in the top 1% bringing in substantial sums in commissions, but this is not the norm for a broker.
“Regarding those in the top 1%, their achievement is built on years of hard work, a deep commitment to their clients, and a knack for creating lasting relationships, generating repeat business and referrals.”
MFAA IIS data provided insights at an aggregate level on commissions.
“At the moment this is around $180,000. However, it is misleading to state this is what a broker takes home in pay. The IIS data very clear states that this is commission before the operating costs of running their business,” said Pannek.
“No matter the size of a broking business, brokers must pay for the running costs of the business from their commissions, whether that is paying for office space, staff, services or regulatory fees. In addition, it takes years to build a broking business, referral network and trail book.”
Brokers a key channel for lenders
Brokers aren’t at war with banks, they are their distribution channel, said Pannek.
Positioning banks as being at war with brokers is like saying Hilton Hotels is competing with travel agents, instead of Hyatt and Novotel. It completely misunderstands how the industry works.”
Pannek said as banks have closed branches, letting their staff go in the process, brokers have filled the gap – all while banks made record profits year after year.
“Mortgage brokers did disrupt the lending market, and this has been good for consumers. Without brokers, we would return to the days where there were only a handful of lenders and as a borrower you just had to take what you were given. Consumers won’t accept that.”
Pannek said competition was here to stay.
“It’s being driven by mortgage brokers, and that is a good thing for Australian borrowers who are paying less interest on every loan because of the rise of the broking channel. Even those who don’t go to a broker to originate their loans benefit from the competition driven by brokers.
“At the end of the day, brokers work for their clients, banks work for shareholders.”
Brokers follow BID
Pannek said one of the biggest inaccuracies to come out from the AFR columns, was the impression that there was an incentive for brokers to suggest clients sell their home simply so they could get a commission on the next property.
“It’s just not true. Nor is it true to claim that increasing house prices are increasing broker pay. The average commission a broker receives has not increased at anywhere near the rate of house prices, and at a time when the cost of doing business is going up.
“Not only that, brokers don’t encourage their clients to borrow more, and it’s lenders – not brokers – who decide how much someone can borrow.”
Pannek said brokers account for less than half of 1% of all banking and finance complaints submitted to AFCA.
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