Big Four are leaning further into in-house mortgages, but is this really a surprise?
The broker-versus-banker pay debate has reared up again following reports that NAB is overhauling lending targets in its high-end Private Wealth division.
According to the AFR, NAB is reducing the weighting of broker-introduced home loans on internal lending targets for certain private bankers, therefore increasing the weighting given to home loans generated directly from NAB’s proprietary channel.
While not confirming or denying the reports, NAB executive, private wealth, Michael Saadie said in comments shared with MPA that “we continue to support customers through a range of channels, including directly via our team and brokers”.
“NAB takes a balanced approach to colleague scorecards, which include financial, customer and risk outcomes," Saadie said.
“We update colleague scorecards annually to ensure they’re aligned to the bank’s priorities in the coming year.
“NAB Private Wealth is a unique offering, with a 1,200 strong team supporting high net worth clients across wealth advisory, private banking and investment services.”
It is understood that the number of bankers dedicated to supporting broker-introduced clients to NAB Private Wealth has not changed.
The reported move comes as little surprise to the mortgage broking industry.
Meeting the bottom line
Major banks have been increasingly focused on proprietary lending in recent times, although not necessarily to the detriment of their broker partnerships.
Under chief executive Andrew Irvine, NAB sees proprietary lending and business banking as its two main levers for growth.
Broker-originated flows at Australia’s largest lender Commonwealth Bank, meanwhile, dipped to just 33% in the second half of its financial year, significantly below the near-80% command of the wider mortgage market brokers currently have.
Then there’s the case of ANZ, whose fairly recently hired chief executive Nuno Matos has made it clear that he’s willing to do whatever it takes to increase ANZ’s share of the mortgage market.
Under Matos’ ‘ANZ 2030’ strategy, the bank is investing significantly in its branches and digital mortgage products. Revealing the strategy earlier this month, Matos spoke of the need of “avoiding disintermediation”.
At the heart of it is margins. Financial institutions have shareholders to please; if broker-introduced loans are less profitable due to the commissions they must dish out to brokers, then it makes natural sense to chase higher margin proprietary loans.
But are they less profitable? Yes, according to Australia’s largest mortgage lender CBA, which claims that broker-introduced loans are between 20%-30% less profitable than proprietary loans.
However, Tim Brown, chief executive of mortgage broking investment group Recludo, argues that the narrative banks present – claiming proprietary lending is inherently more profitable – doesn’t always reflect the true picture.
Talking with MPA, Brown suggested a lack of transparency in how banks calculate the true cost of direct lending, as they “hide costs” by offsetting them into other business areas, making proprietary channels appear more profitable.
This, he argued, distorts the debate around broker remuneration and market share.
Brown emphasised that brokers are a variable cost for banks, unlike the fixed costs of proprietary channels, and that banks’ reluctance to open their cost structures to scrutiny perpetuates misconceptions about broker expenses.
Be careful what you wish for
On average, a broker earns a 0.65% commission on a loan, plus a 0.15% annual trail commission on mortgage repayments. This is an intermediary expense banks theoretically would like to cut down on by focusing their attention on proprietary loans.
But Brown cautioned the banking industry against messing with the current remuneration structure, such as replacing trail commissions with higher upfront payments, a practice recently introduced by Westpac New Zealand.
He explained that while higher upfront payments in place of trail are common in Canada and the US, they often lead to customer churn.
Without trail, brokers have less incentive to maintain long-term client relationships, potentially leading to increased churn as brokers seek better deals for clients once clawback periods expire.
It sounds cynical – after all, brokers are bound by the Best Interests Duty (BID) to do what’s best for the customer, not their own wallets. But Brown defended the value of trail commissions, explaining how they help brokers focus on client outcomes and ongoing service over a longer period of time.
Banks and brokers have similar interests
Regardless of what NAB has in store for its private banking department, the bank has made it clear that the third party channel also remains a strong focus.
“Our ambition is to be Australia and New Zealand’s most customer-centric company. What that means is getting it right for customers, getting it right for our partners. The broker channel is really key to that,” NAB executive broker distribution Adam Brown told MPA.
He stressed that the customer experience is what ultimately matters most. “It’s not always what’s most important to us as a bank, or most important to a broker, but what’s most important to a customer. And so, whilst we want to make things better for a broker and easier to work with us, we’ve got an absolutely fierce determination to get it right for customers as well.”
“The best brokers have the strongest relationships with customers,” Brown added. “That’s where our absolute ambition intersects.”
As for Westpac Australia, it has not made any suggestion that it will follow in the footsteps of Westpac NZ in removing trail commissions. A Westpac spokesperson referred MPA to previous comments made by the bank on the importance of its broker partners.
At a recent major banks roundtable hosted by MPA, Westpac’s head of broker distribution Sarah Willsallen highlighted the investments Westpac has made into improving the broker experience.
The bank has certainly been on a hiring spree, with industry stalwarts Adam Croucher, Ray Esho and Louise Rainger coming to Westpac in recent times.
“These are established industry people with deep connections and experience. They know the broker value proposition,” said Willsallen of the hires. “We want to really show that we’re a brand who believes in broker and we’re here to win.”
Lifting all ships
NAB’s reported change to private banking targets is relatively tangential to the broader discussion around broker pay. It is also not particularly controversial.
“Private bankers should manage relationships, not rely on brokers to find them,” said Troy Phillips, managing partner of Sydney-based brokerage FirstPoint Mortgage Brokers. “NAB’s (reported) move reflects that. They invest heavily in those clients and want their private bankers leading the conversation.”
For Phillips, “the big banks are right to keep strengthening their own channels. Retail banking is still the heart of the business, but a strong private and investment focus complements that, and ultimately, a healthy proprietary network helps lift the whole market, including the broker channel”.
But broker pay is a topic that is unlikely to go away any time soon, especially if the Big Four continue to lean harder into the proprietary lending side of the mortgage market.
Earnings season is just around the corner, with Westpac and NAB kicking things off next Monday and Thursday respectively, followed by ANZ on Monday, 10 November. The broking industry will be watching closely.
