Australia’s largest bank was poised to take the bold step of replacing commissions to mortgage brokers with a flat fee, but chickened out.
Commonwealth Bank of Australia’s now CEO Matt Comyn was a week away from announcing the shake-up in April 2017 when he backed down.
The move would have saved CBA $197 million over five years if everyone in the market moved with it, part of which may have been passed on to consumers through lower interest rates.
But Mr Comyn, then the head of CBA’s retail bank, pulled the pin amid fears the bank would lose business.
“We come to a view that nobody will follow and we will suffer material degradation in volume, and we will not improve customer outcomes,” he told the banking royal commission on Monday.
He had outlined the proposal in an email to CBA’s then CEO Ian Narev, planning to remove the link between the value of a loan and broker commissions,
Mr Narev warned: “As you know, history is littered with banks, even big ones, who try to take on the broker channel and lose.”
Mr Narev also cautioned that “the prisoner’s dilemma” applied.
Mr Comyn said the CEO was questioning whether anyone else would follow if CBA moved unilaterally.
“He’s implying they will not.”
CBA, which is separating its wealth management and mortgage broking interests into a separate company, still pays upfront and trail commissions to home loan brokers.
Mr Comyn said mortgage brokers provided “limited” ongoing services to justify a trail commission, before conceding it was “much closer to none” after being pressed by royal commissioner Kenneth Hayne QC.
Mr Comyn said there were about 1300 brokers earning more than $1 million and the top 200 were getting $2.5 million, thanks to rising house prices.
His proposal would have reduced new brokers’ revenue on an average loan from $6627 to $2310.
Mr Comyn continues to see advantages in a flat fee model, but knows his view is not backed by other industry participants.
Mr Comyn’s proposal would have involved CBA paying the flat fee to mortgage brokers, which the inquiry heard did not remove the incentive for a broker to refer loans to lenders based on the size of the fee they offered.
Mr Comyn said the most attractive model was where consumers paid the flat fee, as in the Netherlands.