One of the key themes to have emerged from the final public hearing round of the royal commission surrounds the fees paid to mortgage brokers.
The heated discussion was sparked when Commonwealth Bank CEO Matt Comyn revealed to some outrage that some of its mortgage brokers were earning $2.5 million a year, due largely to trailing commissions which are paid for the life of the home loan.
Bendigo Bank chairman Robert Johanson, however, defended the commissions to the royal commission on Thursday.
“60 per cent or 55 per cent or something of customers choose to use third parties rather than go direct,” Johanson said.
“So it’s crucial, I think, that we don’t interfere with the ability of customers to choose how they want to interact with this system, that we don’t end up with a fee structure that impedes different ways of providing that access to customers, the customers choose, and we don’t interfere with other potentially disruptive processes,” he argued.
The discussion has seen the suggestion arise that trailing commissions be replaced by an upfront fee to avoid ongoing commissions despite the fact there are no ongoing services.
However, Johanson hinted that a ban on commissions would undermine the broking industry which offers consumers an alternative to dealing directly with the banks.
“If as a result of banning trails we force customers only to deal through banks and bank branches, I think that would be a very bad outcome,” he said.
It’s a sentiment that Wizard Home Loans founder Mark Bouris agrees with, telling Your Money Live that brokers increase competition between the big banks.
“We do not want to kill the broking industry because if you kill the broking industry, guess where people are going to go to borrow money. They’re going to go straight back to the bank and they’re going to go to one bank,” Bouris said.
“The question is how do they find the fine balance between what a broker should be paid to keep the brokerage industry alive and how much do they take away from those brokers who are making extraordinary amounts of money for doing no service,” he argued.
Following the money trail
The dispute centres around trailing commissions, where the lender (which is more often than not a bank) keeps paying the broker a fee every year of the loan.
That commission is ultimately paid for by the consumer, with the lender bundling the price of the commission into the interest rate they pass on to consumers.
What that means, however, is consumers can end up unknowingly paying thousands of dollars extra on their home loan because their broker did some work on it years previous.
Commissioner Kenneth Hayne questioned this during Comyn’s testimony, with Comyn admitting that despite receiving ongoing commissions, the ongoing services of brokers are limited.
“Limited or none?” Hayne asked.
“Much closer to none,” Comyn conceded.
“I’ll take that as a none.”
Remuneration proved to be a key focus of the Bendigo Bank chair’s testimony, with executive pay also under the microscope.
Compared to Bendigo’s larger competitors, the proportion of incentives in its executive pay packets is relatively low.
Bendigo Bank’s chief officers receive a mix of 40, 50 and 60 per cent of their remuneration in a fixed base, meaning it does not change based on the sale of products for example.
The fixed pay at the Commonwealth Bank, in contrast, is closer to 25 per cent.
Johanson also said that his bank caps all bonuses across all salaried staff at $20 million, reducing the incentive for staff to focus on ‘negative’ growth.
“Banks are complicated businesses with lots and lots of moving parts,” he said.
“[If] the numbers get a long way out of expectation… something is happening in the base of the business that’s worth paying attention to. So we don’t want to stimulate that. That’s why we cap it,” Johanson explained.