The Mortgage & Finance Association of Australia (MFAA) has expressed concern at a research report released today by UBS which claims that Australian mortgage brokers are ‘overpaid’, but has based its findings on incorrect data.
The report implies that for every mortgage written in 2015, brokers received an average remuneration per mortgage of $4,600, but this is not correct.
MFAA CEO Mike Felton said the reason for the error was that UBS has divided the total amount of broker commissions in 2015 (which includes upfront and trail commission) by just the number of loans written by brokers in 2015.
"Unfortunately, this report's key finding is wrong. UBS has taken the 2015 upfront commissions plus the 2015 trail commissions (which includes commissions on all loans written by brokers in past years), and divided them by only the number of mortgages written in 2015. This has given them a commission per mortgage that is about double what it actually is in the year of acquisition," Felton said.
"We are extremely disappointed that a reputable organisation would issue a report like this without ensuring that the data they're working with is correct."
Felton noted that there were other claims in the report that the MFAA believed were misleading.
"Contrary to what this report assumes, the ASIC Review of Mortgage Broker Remuneration was a strong affirmation of the value mortgage brokers provide to Australian consumers, and indeed to lenders. ASIC Chairman Greg Medcraft said just a few weeks ago that brokers deliver great consumer outcomes, and that lenders are still responsible for the lending. I have to say, I agree with ASIC," Felton said.
The report also noted that broker remuneration was 'disproportionate for advice provided on a simple, commoditised, single product.' The MFAA would argue that working with a customer to secure a mortgage can be extremely complex and often requires months of work from a broker – not to mention many subsequent years as the broker supports the customer for the life of the loan.
In addition, this is a cost carried by the lender, not the consumer, and the broker channel is an efficient way for lenders to originate loans, as they do not have to carry the salary and branch costs associated with writing these loans.
Felton said he was disappointed by the tone of the report, which referred to a 'blow-out' in commissions paid to brokers and 'unrealistic economic rent being extracted by the mortgage broking industry'.
"An interrogation of the data demonstrates that the increases to total remuneration to the broking channel are not due to changes to commission structures. Any 'blow-out' in commissions is due to the simple fact that every year, more Australians are turning to brokers," Felton said.
"Last year saw a four percent increase in the use of brokers, who are now writing more than 53 percent of all loans as of March this year, as compared to 44 percent in March 2013. We believe this is due to the fact that 92 percent of customers are satisfied with their experience with a broker. Consumers are voting with their feet.
"In any event, while the total amount of commissions to the channel has increased, independent research has shown that the average gross earnings for brokers are about $142,000 per annum, before any superannuation contributions, overhead costs or staff salaries. This includes an average of $83,000 in upfront commissions and $59,000 in trail commissions, which allow brokers to service loans over many years," Felton said.
Finally, there were a number of statements made in the report that appeared to misinterpret the ASIC and ABA reports on mortgage broker remuneration. The UBS report states that both the ASIC and ABA reports found a 'number of material conflicts of interest in the mortgage broking industry and have called for sweeping changes to the way brokers are remunerated'.
"Neither report found material conflicts of interest, they found the potential for conflicts. This is not semantics. There is a massive difference between these two statements. Nor have they called for sweeping changes to remuneration. Indeed, one of ASIC's key recommendations was to leave upfront and trail commissions largely intact, but for some fine tuning," Felton said.
The UBS report also referred to the ASIC and ABA report findings that broker loans were larger, had higher LVRs, were more likely to be interest-only, and were paid off more slowly by borrowers than bank originated mortgages.
"This is not surprising to people in the industry. Brokers work with clients who have more complex or unusual financial situations, who are often unable to qualify easily for a large, low LVR mortgage loan from their lender," Felton said.
"Complexity gravitates towards the broker channel (as does the need for service) and brokers go to great lengths to help these clients find a suitable mortgage product. These may be people with more complex circumstances ranging from professionals to sole traders and contractors who have more difficulty predicting income, or young people who cannot simply pull together $100,000 in cash for their first home.
"We are extremely frustrated by this report. It's a matter of public record that we have expressed broad support for the key policy recommendations made in ASIC's report on broker remuneration, which was released following more than 12 months of industry consultation and research. That report concluded that 'neither ASIC nor this Review has found compelling evidence of systemic harm'.
"The MFAA and the entire industry are aligned in their pursuit of a sustainable industry, with a balanced, fair and equitable approach to consumer outcomes. We will continue to work with ASIC to contribute strong and realistic solutions to the issues raised in its report," Felton said.