Removing broker commissions is a double-edged sword

The number of mortgage brokers providing a money-saving service to consumers could fall under changes recommended by the banking royal commission, says Mark Humphrey-Jenner of UNSW Business School.

“Removing brokers’ commissions could have serious unintended consequences,” says Associate Professor Mark Humphrey-Jenner from the UNSW Business School. “Indeed, the RBA Governor has endorsed a ‘cautious’ approach to winding back commissions in these cases.”

The banking royal commission recommended commissions for mortgage brokers be axed, that brokers be regulated like financial advisors, and that brokers be under an obligation to act in clients’ best interests.

However, Mark Humphery-Jenner, an Associate Professor of Finance at the UNSW Business School, says there could be a side effect of removing commissions.

“If the government removes commissions, then brokers must receive payments from borrowers rather than from lenders,” he says.

He argues this would result in borrowers facing higher upfront fees.

“Whereas commissions could previously be bundled in the total mortgage package and paid throughout the life of the loan, which many people may not notice, they would now need to be paid upfront. Imagine telling a first-time buyer, stretched to the limit to buy a one-bed unit in an outer suburb that they need to pay a ‘fee’ of thousands of dollars upfront to get a mortgage. It would wipe out a chunk of their deposit.

“Only wealthier borrowers could access mortgage brokers,” he says.

Faced with this, A/Prof Humphrey-Jenner says, borrowers might balk at the fees and actually approach banks directly for a mortgage.

“Bank staff exist to facilitate loans with their own bank. By contrast, brokers consider products from multiple banks. While people can, if they choose, shop around for the cheapest mortgage, this is time consuming and implicitly costly as they navigate which banks provide the most suitable product. Therefore, the work for people who previously used borrowers would increase. And, as we have seen in everything from the power market to insurance, very few people really shop around.”

Additionally, as borrowers deserted brokers due to the large upfront fees, brokers’ earnings would fall.

“This will disproportionately affect smaller brokers. Larger brokers would also be affected, but due to economies of scale, would be slightly less affected. In turn, this could cause some brokers to close or to merge. This could reduce the choices available to borrowers as they might lose small – but nevertheless competent – mortgage brokers, who really know they customers.”

A/Prof Humphrey-Jenner has looked at the current banking landscape, and says that overall, while it is necessary to ensure that bad actors are removed from the brokerage industry, it is necessary to consider other unintended consequences of cutting commissions.

“It will harm many honest brokers. In turn, this could harm individuals’ access to valuable advice. This is especially poignant as the proposed best interests’ obligation, coupled with additional licencing, plus the commercial reality of securing clients can help to rein in conflicted advice.”

For further comment call Mark Humphery-Jenner on 02 9385 5853, 0412 9653 40 or email m.humpheryJenner@unsw.edu.au.