November 25, 2018

AFR : Dutch model of mortgage broker pay can work, says Lendi’s David Hyman


by Misa Han

The Dutch model of customers paying an upfront fee when they apply for home loans, instead of upfront and trailing commissions, could work as long as it applies to lenders and brokers equally.

That's the view of David Hyman, the managing director of Macquarie Group-backed online mortgage broker Lendi, who said applying an upfront fee only to mortgage brokers would favour big banks at the detriment of brokers.

"We think the Netherlands model is the only fee-for-service model that would work without killing competition," he said.

Under the Dutch model, banks are banned from paying commissions to mortgage brokers, which means customers have to pay for the service.

In the Netherlands, customers typically pay an upfront fee of between €2000 ($3143) to €3000 to brokers and lenders.

This resulted in removing conflicted remuneration for brokers and made mortgages cheaper for customers overall.

The Dutch model was discussed in the banking royal commission last week, when Commonwealth Bank Australia chief executive Matt Comyn said he had studied the model and believed the introduction of a flat fee would lead to better customer outcomes than the current commission model.

Mr Comyn said customers would continue to use brokers, assuming the fee applied to all institutions, because he believes customers value the service enough to pay a fee.

"I think it would put a material disadvantage to the brokers if customers paid a broker but they didn't have to pay a similar amount to a financial institution. I think that would create a distortion," Mr Comyn said.

He also proposed moving to a model where the bank would pay an upfront fee on behalf of the borrower, but eventually abandoned the idea.

Mr Hyman agreed the fee would need to be applied to brokers and banks, or it would only benefit the big four banks – who have large branch networks that together issue more than 80 per cent of home loans – at the expense of mortgage brokers and banks without a large branch presence, such as ING and Macquarie.

Removal of conflicted remuneration

However, this is not the view the broader industry is prepared to adopt yet.

The industry view is that the customer paid fee for service model would reduce the choice of mortgage brokers and disadvantage smaller players.

The Combined Industry Forum, which represents banks, brokers and lobby groups, said in its submission to the banking royal commission's interim report this would result in a reduction of broker numbers, decreasing competition and consumer choice.

The industry also said this would disadvantage smaller lenders and those without a branch footprint, including new entrants such as fin-techs.

Mr Hyman believes a "regulation-lite" approach of removing volume-based commissions can work to remove conflicted remuneration for brokers, without having to adopt the Netherlands model.

The banking royal commission will be back in session on Monday.