Will consumers accept upfront mortgage fees?
The recent findings of the Royal Commission on mortgage broker pay has put the focus on whether the current model of commission payments is in the interests of the broker, the lenders or the consumers.
These discussions have involved the following suggested changes by various parties:
- The abolition of up-front commissions;
- The abolition of trail commissions; and
- The introduction of a ‘fee for advice’ payable to brokers
The reason for the proposed change in the remuneration model and a move away from commission is that there is an inherent bias in the choice of lender that a broker will recommend because one lender may pay more commission than another and the consumer does not know what this is. The removal of commissions would remove the bias, so goes the argument.
We conduct a huge amount of consumer research in the banking industry and it’s worth outlining the drivers behind why consumers choose their lenders.
By and large consumers in Australia are becoming increasing cost-conscious. They question the value they get from their service providers and the fees that they are paying for products and services. In the banking space this is no different.
In fact, in the last two years, the fees payable on a home loan have become the second biggest reasons a consumer chooses a home loan provider (rate is the biggest reason). This stands in stark contrast to five years ago, when the biggest influencer on choice of provider was the main financial institution (MFI) relationship.
Source: RFi Group
In addition, when it comes to the reasons that consumers choose a broker, independence is ninth in the list of importance. Referrals and recommendations are the primary driver (37 per cent of responses) of business for brokers and repeat customers are the second biggest driver (26 per cent). Both of these mean that brokers inherently have to do a good job at servicing their customers. If they don’t then they don’t get a repeat customer and they don’t get referrals.
Related to this, the third, fourth and fifth biggest reasons for choosing their broker are also experience-related. The broker provided ‘the best advice’ and ‘the best customer service’, followed by ‘willing to visit me at home/ work’ garner 26 per cent, 23 per cent and 22 per cent of responses respectively.
To put this into context, independence comes in ninth with 13 per cent. Customers value the service and the choice and nothing in this suggests to me that they have an issue with commissions.
Source: RFi Group
I firmly believe that if faced with the option of paying a fee through a broker or going direct to a lender for a product, then - despite the growth we have seen in broker usage in recent years - consumers will choose a no-fee direct to lender model.
The answer that has been thrown out to combat this is a fee paid by both the broker and the lender. However, the danger with this is that it becomes a competitive lever. I am not saying every bank will jump to discount the fee, but it only takes a few to try the tactic before it becomes a race to the bottom. This is not something that the broker will be able to do as they don’t effectively ‘own’ the product they are selling.
RFi’s research on trust has shown that the thing consumers want from their service providers is transparency on fees and charges. Perhaps then we should make brokers stipulate up-front in a simple and clear way, what commission rate they get from the specific loan they are recommending vs other loans in the market. That, alongside a crack-down in other undeclared incentives would serve the consumer much better.
Alan Shields is the chief product officer of RFi Group. The full report will be available in the March edition of AB+F