Daniel Paci believes that the Banking Royal Commission recommendations are targeting the wrong people. Mortgage brokers will suffer, while the banks will remain unscathed.
Daniel Paci is a driving force in the Mortgage Broking business. He is one of a select group of mentors accredited by both the Mortgage and Finance Association of Australia and the Finance Brokers Association of Australia.
He has guided the careers of hundreds of mortgage brokers and retains respect throughout the industry for his passion and insight.
He recently sat down with The Big Smoke to talk about the potential impact on his industry of the recommendations made by the Royal Commission into Banking.
Hi Daniel, what was your first reaction to the Royal Commission’s recommendations?
I was dumbfounded. I couldn’t believe that a body investigating misconduct by the banks would recommend the destruction of a related industry whose conduct by comparison has been exemplary.
What exactly did the Commission recommend?
Fees for mortgage broker services should be paid by borrowers—our clients—rather the banks who are the lenders. They believed that because we are paid by the banks our loyalty is primarily directed to them rather than to our clients.
Is there any merit in that argument?
None whatsoever. The mortgage broking industry came into being only because the banks were incapable of providing the level of personal service that borrowers needed. We wouldn’t exist if we didn’t provide our clients with a markedly superior service. A recent research study showed that 95% 0f our clients would use us again and 84% were totally satisfied with our service. The corresponding numbers for bank clients were 31% and 25%. Our presence in the mortgage market creates a competitive environment that keeps bank interest rates down. We’re about service while the banks are about profit.
Could your clients afford to pay the level of fees needed to sustain the current levels of mortgage broker service?
No way. To guarantee the same level of revenue clients would have to pay mortgage brokers an upfront fee of at least $5,000 and in many cases well in excess of that. Not only is that an onerous new imposition on our clients but it is also in contravention of current government policy. They abolished the deferred payment fee charged by banks when borrowers switched mortgages because it deterred them from switching to better deals. Requiring our clients to pay us an upfront fee on every new mortgage would in fact reintroduce that deterrent.
What would be the impact of all this on the banks?
They would make extra profit because they’d retain the fees and commissions they pay to us, there would be no pressure on them to raise their service levels and in a less competitive market there would be more opportunity for them to raise interest rates. It’s hugely ironic that after the Royal Commission recommendations were made public shares in banks went up while mortgage broker shares dropped dramatically. So incredibly the banks come out of the Royal Commission relatively unscathed and we got hammered.
What would be the effect on the mortgage broking industry if the Commission’s recommendations were implemented?
It would be devastating. It would destroy the livelihoods of up to 22,000 mortgage brokers as well as their employees. Furthermore, it would have a disastrous effect on the revenue of our associated service operations that employ around 100,000.
Also on The Big Smoke
Could you please explain how mortgage broker income is calculated?
Banks pay on average a fee of .65% of the loan amount on settlement. Then there is a trailing commission of .2% of the borrowers’ monthly payments.
Contrary to the Royal Commission recommendations, both the Coalition and Labor now agree that the upfront fee should still be paid by the banks rather than borrowers, but they are still to be convinced about trailing commissions.
Trailing commissions are vital to sustaining the highly successful mortgage broker service model. They enable us to provide valuable ongoing support to our clients like advising them when they can save money by switching mortgages.
What happens when one of your clients withdraws from a mortgage prematurely?
It can result in a big financial hit on mortgage brokers. If it happens in the first year of a loan the bank can claw back 100% of monies paid to a broker, 50% if it happens within 12 to 18 months and 25% between 18 and 24.
So advice which can prove very profitable to clients can come at a great personal cost to us, but we still don’t hesitate to work in their interest.
How would the recommended changes to income affect you personally?
I’d have to seek a new career path.
Are there any other key points you would like to make?
59.1% of all mortgages are arranged by brokers. We have built a $2.9 billion industry. The banks would never provide the level of personal service that we are proud to deliver. People don’t trust banks because they always place shareholder dividends ahead of client satisfaction. On the other hand mortgage brokers provide a great service to both clients and banks.
Is support for your cause growing?
I’m encouraged by the great support we’ve received so far and I’m confident that the mortgage broking industry will prevail. Everyone will finally realise that it ain’t broke so it doesn’t need fixing. If there’s anything about this issue that mortgage holders, mortgage brokers, politicians, potential house buyers or anyone else would like to discuss I’d be delighted to hear from them. They can contact me either at daniel.paci@vaultmortgage.com.au or on 0401 167 149.
