Sam White responds to AFR articles

Over the weekend the AFR published two articles on mortgage brokers and banks. While some of the information was correct, these articles also contained errors and assertions that were incorrect. I would like to set the record straight. 

The articles acknowledged that brokers have saved clients money by creating asset competition. That part is right. Australian borrowers pay less interest because of brokers. Net interest margins have come down, the mortgage loyalty tax has reduced, and customers have an advocate to ensure they get a fair deal.

However, the articles then make assertions that simply aren't true. Among these errors are assertions that:

X  Mortgage broker earnings are exorbitant, misrepresenting broker revenue as personal income ignoring business expenses

X  Advice brokers give has not changed since the Royal Commission, overlooking the increased complexity and costs due to Best Interests Duty. 

X  Assertion that commissions are opaque and not transparent 

X  Client recommendations are driven by commissions, unfairly suggesting brokers prioritise commissions over clients’ best interests. 

Proud of the service brokers provide their clients

The article suggests brokers do not provide a reputable service to clients, which is deeply incorrect. Here are the facts:

• In one article, it correctly states that the broker market share has grown to over 70% of new lending in Australia, largely driven by word of mouth. But this couldn’t and wouldn’t happen if consumers did not find value in the services of brokers.
• The LMG Net Promoter Score (NPS) for brokers by clients is consistently high, exceeding +90, compared to banks’ NPS scores of 0 to 30 (sourced here).
• Complaints against brokers are minimal. In FY23, out of 53,648 complaints in the financial services industry, only 332 (or 0.3%) were made against brokers (source here). 

Given all the commentary about mortgage stress, I think these clearly reflect the outstanding, reputable service that brokers consistently deliver to their clients.

Mortgage broking revenue and the average broker earnings

The articles imply that brokers business revenue is exorbitant. Here are the facts:

• Brokers’ revenue is typically made up of an upfront fee (0.715% inc gst of the loan amount) and a trail fee (which varies from an average 0.15% of the loan amount in year one and increases to an average of  0.18% in year three across our top 20 lenders). These fees are largely standardised across lenders and can be fully or partially clawed back within two years after loan settlement. The average fee across our group after clawback and net of offset calculations for FY24 is 0.592% and 0.171% trail (excluding gst). 
• The claim that a broker would be paid $14,000 for an $800,000 home loan is incorrect. On such a mortgage, the broker's business revenue (before costs) would be significantly less and come in at $7,641 in upfront and trail income over 3 years. If the client refinances within the first 12 months, all of that commission is typically repaid by the broker to the bank. 
• The statement that “the average Sydney broker earns $400,000 in upfront fees per annum” is incorrect, sourceless, and misleading. To earn this, a broker would need to settle $61.5M in residential home loans annually, a volume achieved by only 5.1% of brokers in our group. 

Broker commissions are business revenue, not broker income. 

Brokers operate a business, incurring expenses such as aggregation fees, technology charges, marketing costs, business insurance, salaries, and rent. Therefore, the revenue figure does not equate to a broker's personal salary.

In the example given in the article, a broker business earning $400,000 in upfront business revenue would most likely be engaging support staff or employing additional brokers. Implying that this business revenue figure equates to a broker's salary is both misleading and disingenuous. 

One article makes an extraordinary claim that because of upfront fees, brokers convince their clients to sell their house and trade up for a new one. I have never heard this claim before. On an $800,000 mortgage, the upfront business revenue before costs would be $4,800. The trail fee continues regardless of whether the client sells their home and buys a new one.

The idea that a broker would convince a client to sell their house, pay agents fees, stamp duty and relocation costs all because the broker would receive a new upfront fee is incredulous. If this practice exists, it must be stamped out and I will hold those brokers to account. I would be very interested, as I am sure ASIC and AFCA would be, in any evidence or information proving that brokers have convinced clients to sell their homes just to receive a new upfront fee.

Impact on interest rates

The assertion that reducing broker commissions would benefit consumers by lowering interest rates is questionable. This assumes that banks would pass on savings in broker commissions to the consumer rather than improving their profitability. If so, that's a big assumption. What evidence supports this assumption? Historically, banks have not consistently passed on RBA cuts to consumers. This deserves further scrutiny. 

Increased costs and complexity for brokers

The article claims that brokers' advice has not changed over time and since the Royal Commission. In reality, the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended that brokers operate under a Best Interest Duty, which we welcomed to codify something we have always believed in. 

However, it is wrong to claim that the complexity and costs for brokers have not increased. Legislation has added significant work to ensure Best Interests Duty is met and brokers now need to do many of the checks that banks also do before submitting a loan, such as conducting credit checks, income checks, and expense analysis. Many brokers handle this extra work and research by employing staff, increasing their business expenses. See an example of an LMG Game Plan provided to a client. 

Transparency of commissions 

It has been claimed that broker commissions are opaque. Brokers are required by law to disclose the commission they are paid by lenders. They also disclose the top six lenders they use and the proportion of loans submitted to each. The implication that brokers ignore the Best Interest Duty is unfounded. Detailed documentation accompanies every client recommendation, giving the client transparency and power to make the best decision for their requirements. 

Mortgage brokers generate competition

Mortgage brokers have created significant competition in the Australian mortgage market, resulting in better pricing, services and outcomes for consumers. The declining net interest margin, growth in mortgage broker market share, high NPS and low customer complaint rates all point to an industry focused on the consumer.

We all understand why banks would want to reduce broker commissions and increase their net interest margins and their profits. Weakening brokers will only reduce competition, leading to higher interest rates and a return to the imbalance of power between a lender and borrowers of Australia.

Thanks for taking time to read this. I welcome your thoughts on this to ensure we have a balanced view of the mortgage broking industry. Connect with me on LinkedIn.

Sam White
Executive Chairman
LMG