McAlary is familiar with the US mortgage market because he is in the process of establishing a wealth management business there.
His knowledge of the Australian financial services market comes from several decades providing advice and consulting services. His company has an Australian credit licence and an Australian Financial Services Licence.
Until now there has been little discussion of alternative remuneration models apart from the one being used in the Netherlands. The Dutch approach has been touted by several leading players including Commonwealth Bank of Australia CEO Matt Comyn.
But most of the discussion of the Dutch model has been ill-informed and lacking context. There has been lots of discussion of the fact the Dutch banned banks from paying commissions to mortgage brokers.
But there has been little discussion of the tax deductibility available in Holland for mortgage borrowers.
Mike Felton, chief executive of the Mortgage & Finance Association of Australia, says borrowers in Holland are able to claim as a tax deduction all costs involved in setting up a loan including the fee paid to the bank or broker which ranges from $3200 to $4800 depending on the size of the loan.
Also, it is worth reminding readers that all interest payable on a residential mortgage in Holland is tax deductible. Good luck convincing the Labor party to introduce that at the same time as they are cutting the tax deductibility inherent in negative gearing.
The Hayne inquiry’s final report recommended the borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. The report suggested a two-stage process for reform with trail commissions prohibited first and two or three years later up front commissions banned.
Felton says the description contained in the Hayne report about how the fee might be calculated pointed to potential problems in the smooth functioning of the mortgage market.
The report said a Treasury-led working group or the Australian Competition and Consumer Commission “should be responsible for monitoring the fees set by banks and ensuring they charge no more than the additional costs to the bank of making a loan to the borrower through its proprietary lending channel rather than through a broker”.
Felton from the MFAA interpreted this to mean that a bank could charge a fee equivalent to the marginal cost of processing a loan. He says the marginal cost of processing a loan through a bank with a large branch network would be far smaller than the fee needed to be charged by a broker.
He says a broker needs to charge enough to run a small business and this would probably be in the region of $3000 to $4000 for each loan. Felton claims there would not be channel neutrality because banks could charge to cover costs while brokers would need to charge to make a profit.
It is difficult to test Felton’s claim that banks would always be able to undercut brokers but he is probably right when he says the fee would become a barrier to refinancing of loans.
The average Australian mortgage is moved from one borrower to another or refinanced every four years. Borrowers would think twice about changing their loan if they had to pay up to $4000 to get a new loan.
‘Forces of disruption’
The debate over mortgage commissions has devolved into two camps. There are those, such as Treasury and the mortgage broking industry, who said that an end to commissions will be detrimental to competition and benefit the established banks.
Then there are those who say that conflicted advice is bad for consumers and should be removed from all areas of financial services.
There is a third perspective and it comes from Westpac Banking Corp chief executive Brian Hartzer, who says it’s all about the value provided. He tells Chanticleer that irrespective of reform to commissions the mortgage broking industry is facing the sort of technology-driven disruption that ultimately hits every industry.
“I think there will continue to be a role for mortgage brokers,” he says.
“Clearly customers value a sense of choice and support advice that they get through that process. I think brokers who continue to clearly add value to customers will continue to have viable businesses.
“I think bringing more transparency to the cost of the advice they are providing is a good thing. I think the real measure of success here should be: What’s the net result for consumers in terms of the value that they get?
“I accept that people might take a jaundiced view of me saying this but I think some people seem to think that simply having more competitors gives better consumer outcomes and actually the measure should be good consumer outcomes and good consumer value.
“You know there’s a lot of cost embedded in the mortgage broking process. And if consumers are happy to pay that that’s good. But mortgage brokers are likely to be subject to the same forces of disruption as are affecting banks generally and indeed many other industries.”