Opinion
Rise of the mortgage broker: Battle brews over home loan spoils
Clancy Yeates
Deputy business editorWhen the 2018 banking royal commission swept through the industry, one of its big lessons was that the staff incentives offered by big businesses matter – a lot. That may sound painfully obvious but remuneration schemes and their influence on staff behaviour were a recurring theme of former High Court judge Kenneth Hayne’s probe, and of how the industry has since sought to improve.
Six years later, banker bonuses are back in the spotlight, after Commonwealth Bank and National Australia Bank have this year scrapped previous commitments on how they pay certain staff.
CBA and NAB have this year increased caps on bonuses for home lenders.Credit: Jessica Shaprio
To recap: earlier this year, CBA said it would increase the maximum bonus it would pay some home lending staff to 80 per cent of their fixed pay, up from 50 per cent. NAB followed its rival last month, insisting it was making the move reluctantly.
The watchdog isn’t too happy about these changes, because the banks are reversing a 2017 initiative aimed at lowering the risk of a sales-driven culture, and all the problems that creates.
The chair of the House of Representatives banking inquiry, Labor MP Dr Daniel Mulino, has wondered if this could be an example of “old practices creeping back in”. Good point.
However, it’s also clear from recent hearings overseen by Mulino that these changes on pay are part of a deeper economic fight: the long-running contest between banking giants and mortgage brokers, who are competing to retain lucrative relationships with borrowers.
That tension between banks and mortgage brokers is one of the more interesting battles in banking today – indeed, some think it will have a major bearing on which banks end up being the biggest winners in the home loan market.
The rise of mortgage brokers in recent decades has been a crucial long-term shift in retail banking in Australia.
Latest figures from the Mortgage and Finance Association of Australia show that brokers write almost 75 per cent of all new home loans – up from about 60 per cent five years ago, and less than 50 per cent in 2012.
Such rapid growth has naturally ruffled feathers in banking. Not only do banks face the cost of paying brokers more commissions for selling the loans, but the rise of brokers has also helped to encourage customers to shop around and refinance – a positive trend for customers.
This has helped to turn home loans into “commodities” – most customers don’t care which bank provides their loan, as long as the mortgage is approved in time and at a competitive interest rate. It also helps that broking appears “free” to the customer – though it’s paid for by a commission from the bank.
For banks, however, the rise of mortgage brokers has eaten into profits and driven down returns from home loans. Banks are trying to fight back, and the recent moves on bonuses should be seen in that context.
CBA’s chief executive Matt Comyn told a recent parliamentary inquiry that the bank’s move to raise maximum bonuses for some home lending staff was an attempt by the bank to keep high-performing bankers, who can make more money as mortgage brokers (where there’s no limit on the commissions you can make – though there are legal duties to act in the customers’ best interests).
“We felt that we were putting ourselves at a significant competitive disadvantage,” Comyn said.
CBA chief executive Matt Comyn at the house economics committee in Canberra last month.Credit: Alex Ellinghausen
The broking industry peak body reacted furiously to Comyn’s comments, stressing that brokers are held to higher regulatory standards than bank staff.
NAB chief executive Andrew Irvine told the same committee its move to raise bonuses was made reluctantly, but he indicated that NAB felt it had to match CBA to hang onto top staff.
“Unfortunately, following the announcement by one of our competitors, I think it made our situation untenable,” he said.
Westpac is considering whether to follow its rivals, and it would make sense if ANZ was also watching closely.
These changes from NAB and CBA have been branded “disappointing” by the Australian Securities and Investments Commission, and consumer group Choice is also concerned. The worry is that if banks start offering bigger bonuses to staff who sell the most mortgages, it will encourage mis-selling. Time will tell if those risks eventuate, and ASIC has said it will monitor the situation closely.
For bank investors, meanwhile, the changes to bonuses are part of a wider battle between brokers and banks over who pockets the profits from the $2.2 trillion mortgage market.
CBA has also launched a no-frills digital loan in recent years that has a lower interest rate but cannot be sold through mortgage brokers. NAB’s Irvine has also made it clear that home loans sold via brokers were less profitable for the bank.
At the other end of the spectrum, Macquarie has relied on mortgage brokers to become the great disruptor of the home loan market of the past decade. It’s amassed a share of 5.5 per cent in home loans (a big move in this business) and in July, its home loan portfolio grew more than five times faster than the market. ANZ has also been making greater use of brokers recently as it’s tried to expand its share.
Veteran banking analyst Brian Johnson, of MST Marquee, said the use of brokers was one of the most important issues in retail banking because loans written through brokers were less profitable for banks. “You’ve got this massive bifurcation between strategies,” Johnson said. “It’s the most significant thing in the market.”
With brokers now writing almost three in four new loans, they are clearly here to stay. That is one reason why the mortgage market is a less profitable hunting ground for banks than it once was. It’s also why the banks are attempting to reassert themselves, even if it means breaking some previous commitments.
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