Banks to take the knife to broker commissions

Banks are poised to make big changes to the commission structures under which they deal with mortgage brokers. Among the changes will be a reduction or removal of trail commissions and a move from uniform commissions to scaled reward-based payments.

Managing consulting director at Fujitsu Consulting, Martin North, said yesterday the banks have been unhappy with broker commissions for some time, but conditions were right for them to do something about them because they had regained some pricing power. Banks’ share of the mortgage market is going up and brokers’ share of originations is going down.

North said: “Under current market conditions, and given commission structures, bank profits on home loans have gone down but broker profits have remained unaffected.

“All the banks are looking at commission structures and I would expect to see some action soon.”

Brokers may not have to wait long, as decisions may not be far away. Industry chatter centres on Westpac as the lender already talking openly to business partners about cuts to commissions and warning that some suppliers within the mortgage chain can expect to go out of business.

North said the prime target was the trail commission, which is unique to the Australian and New Zealand mortgage markets.

He said the practice of paying an ongoing commission, which increased with the life of the loan, had added to costs without providing the hoped-for benefit of keeping the loan on the books for longer.

North said uniform commission structures had also proved to be unproductive. Performance-based commissions were under consideration.

He said it was possible that the Australian market could move in the direction of the British market, where loan brokers had remuneration structures similar to financial planners and charged the client for the service rather than taking a commission from the lender.

The latest JP Morgan Fujitsu Consulting Australian Mortgage Industry Report, published yesterday, shows that the global credit market liquidity crisis has had some marked effects on local mortgage market dynamics.

Broker share of loan origination peaked at 38% in the middle of 2007 and fell back to 36% in January 2008. This is the first time in the history of the survey (data goes back to 2002) that brokers have lost ground.

JP Morgan senior banking analyst Brian Johnson said banks were enjoying two benefits – non-bank originators were withdrawing from the market or scaling back their operations; and banks were getting some positive results from their investment in branch expansion and customer satisfaction programs.

This story first appeared in the Sheet.com