Referral fees not as bad as first thought shock! The Australian Consumer Association finds a new source of funding

Me in today’s Crikey

It’s a dirty business but someone has to do it. Selling home loans that is. Now after a lifetime of howling protest about the commissions mortgage brokers make, the Australian Consumer Association – AKA Choice – is helping itself to some of those commissions.

Over eleven years ago I founded Peach Home Loans to rebate a large slice of the commission banks and other lenders pay brokers for selling their loans.

Did I say ‘selling’? Well yes, I did. Mortgage brokers are remunerated as salespeople – and for years it’s suited them to pose as independent advisors choosing the right loan for you. Among the things they don’t tell you is that they don’t cover the field, that there are loans available that don’t pay them commission and so they don’t write them.

That makes them like computer salespeople in a department store – people who often know a lot more about the product they’re selling than their clients and able to sell from a range of brands. The good ones try very hard to inform their clients and indeed to get them the best loan possible, both because they like helping people with their skill and because in a competitive marketplace, doing the best they can do for their clients is a pretty good recipe for their own self interest (See Adam Smith, 1776 for further details).

Since I founded Peach, the government has got in on the act, imposing heavy regulation on the industry including licensing.  It hasn’t mandated that brokers inform their clients that they only sell a sub-set of the loans on offer. But it has licenced them so that today loan salespeople can advertise themselves as government licenced, which legitimates their posing as objective fiduciaries when they are remunerated as agents of the lenders.

Now Choice has teamed up with an organisation of calling itself One Big Switch the main players of which appear to be luminaries with links to progressive campaigning organisation GetUp.Lachlan Harris – Kevin Rudd’s press secretary when he was PM is a co-founder.

One Big Switch claims to be able to wring better deals out of the banking oligarchs using the power of bulk purchasing. It will “help ordinary Australian households get the discounts, terms and conditions that big companies and high net worth individuals get every day.”

Having seen a fair bit over the last eleven years, I’m sceptical.  These kinds of claims are routinely made in this industry – see for instance www.ratealert.com.au and www.bidmyloan.com.au.  There may be substance to it, or it may be mostly marketing.  But there’s nothing wrong with a new commercial venture putting a commercial deal to the market and trying its luck.  I wish One Big Switch all the best.

But it amazes me, utterly flabbers my ghast that Choice is coming along for the ride, and, as it confirms on its website, will pocket referral fees “to help cover the costs of creating and delivering the Choice Big Bank Switch campaign. . . . If the fees received by Choice . . . are more than the cost of the campaign, they will be directed entirely to future campaigns that will benefit consumers.”

The One Big Switch site seems less forthcoming about its revenue model than most mortgage broking websites. I can’t find a single reference in the main pages of its website to the commissions they or Choice will make, though the Finance Broking Contract on their site does disclose that they will be paid a commission – which will be disclosed to borrowers.

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9 Responses to Referral fees not as bad as first thought shock! The Australian Consumer Association finds a new source of funding

  1. hrgh says:

    CHOICE do seem to be flailing around in the search of sustainable funding of late. Their attempt to enter the energy ‘switching’ website market floundered.

  2. Pedro says:

    I’ll be really disappointed if they are not transparent.

  3. observa says:

    One week wonders for the simple fact Choice are trying to flog an homogenous wholesale aggregate when they really have lots of small retail items to sell. ie a few thousand differing risk return offers to the banks mainly. And just what sort of risk return punters have they gathered together with their hype? Nothing like giving the old mortgage backed security scam another run after the GFC. You never know, the banks might have very short memories but count me a skeptic in the current economic environment.

  4. Nicholas Gruen says:

    observa, you do know that securitisation of prime home loans in Oz didn’t degrade credit standards don’t you, that not a single parcel of loans sold during that time has lost its capital value?

  5. Patrick says:

    In fairness, Nick, I think Observa is focusing on the impact of complex securitisations on the holders of the securitised interests, not the lenders and borrowers.

    Also, Australian loans have arguably not been ‘stress-tested’ yet…our property values remain improbably high.

    But I absolutely agree that securitisation is not to blame for lowering credit standards in Australia, although it probably did help lower credit costs slightly (and raise bank profits somewhat too!).

  6. David Walker says:

    As someone who has watched the organisation with interest over the years, and who spent some time in the mortgage industry, I too find this an interesting move by Choice (the old Australian Consumers Association).

    Choice has the same problem as the newspaper industry. In a world where consumer advice has become almost ubiquitous, Choice’s old business model of consumer product research appears to be obsolete. But it has the same management overhead it had back then, plus a policy arm.

    So it’s trying to find new revenue sources. It’s also finding that commerce is harder than it looks.

    Its latest sally into banking actually follows a move into online electricity and gas switching. That lost $815,000, as detailed in Choice’s 2010 annual report.

    Since that unfortunate incident Choice appears to have avoided putting so much of its own money at stake. Instead, it’s offering its media credibility, its public trust and its access to its members. Its list of commercial partnerships is now quite long and includes what are essentially lead referral deals with GetPrice and Mozo. It has an endorsement program where it gives the stamp of approval to recommended products for a fee, which surprised me when I first heard of it.

    What’s most interesting is the rhetoric it is using to justify its actions to its members and the public. Its Big Bank Switch is about using the “potential power of group switching to reset the power between consumers and big business”, it says. It is thus firmly against Choice’s commercial interests to suggest that the power switch from banks to consumers might have happened long ago, in the 1980s and 1990s, driven by financial deregulation and a bunch of entrepreneurs like John Symond.

    Essentially, Choice has a commercial marketing pitch that relies on convincing people they are being preyed on by big business.

    Not surprisingly, some Choice members are uncomfortable with the whole thing too.

  7. observa says:

    Yes I know the difference and circumstances but it was more a comment about what Choice were trying to flog to mortgagees (ie we can bundle you all up as some kind of MBS like millionaires) when Choice couldn’t possibly sell them to lenders that way. The thought crossed my mind that if any mortgage arranger other than Choice were hawking that line they might be in trouble with the ACCC for false advertising. In any case all they’ll likely catch with their baited line are those struggling to pay their mortgages now. When they can’t perform miracles with these loaves and fishes Choice will be in deep doo doo like Govts dangling Grocerywatch and Fuelwatch lines. Shades of past ACTU Solo adventurism too if you ask me and Choice should wisely get back in its comfy subscription padded box. We’ll see.

  8. observa says:

    Did I aim the gun in the right direction and squeeze the trigger correctly after you loaded it so nicely Nic? ;)

  9. Nicholas Gruen says:

    David Walker takes up the story on Banking Day.

    Choice, formerly the Australian Consumers Association, is on the defensive over its decision to become a loan referrer.

    At the weekend, Choice announced that it had struck a deal with new finance broker One Big Switch “to find 1000 Australian mortgage holders willing to switch banks together for a better mortgage deal.”

    The deal initially drew highly positive coverage from the mass media, with Sydney’s Daily Telegraph declaring: “Borrowers get power to force rates cut.”

    But it has since come under fire from Choice members, and from mortgage industry experts, including prominent economist Nicholas Gruen.

    Choice communications director Christopher Zinn told Banking Day yesterday that feedback on the deal had been “overwhelmingly positive”, but that there had been some concern from members. Online comment by established members at the organisation’s website appears to be closer to 50-50 on the merits of the arrangement.

    One online member comment referred to Choice’s “growing hypocrisy… destroying years of reputation-building”. Another called the deal “disgraceful… effectively an endorsement of a mortgage broking company that stands to make a significant amount of commission courtesy of trading on Choice’s strong consumer protection brand.” Other members enthusiastically supported the deal.

    Among questions raised by Choice members is the lack of a clear public mechanism for ensuring that the deal presented by One Big Switch is the best available to members. Lenders offer loans through brokers under many different financial arrangements, and some do not offer them through brokers at all.

    Asked what process existed for ensuring the deal selected by One Big Switch was the best available from all lenders, Zinn said that Choice was “only the referrer” and could not legally get involved with negotiations between One Big Switch and lenders. Since Banking Day had not suggested Choice become involved in lender negotiations, we were surprised by this response.

    Zinn did say that he expected the offer to receive significant scrutiny. “So, we will hear if there is something better. And if [the offer] isn’t better than one that’s in the market, then we have said that it won’t be offered.”

    Zinn could also not say whether there was evidence that “group buying” of loans would provide any savings to consumers.

    Nicholas Gruen, who also owns mortgage broker Peach Home Loans, told Banking Day that Choice’s new role was “entirely inappropriate”.

    “They have set themselves up as an independent arbiter of what’s good value,” he said. But they were now using a “classic marketing technique” that claimed to provide the best-value option “and it’s nothing of the kind”.

    Private firms such as Rate Alert were using an almost identical strategy, he noted.

    He also questioned One Big Switch co-founder Lachlan Harris’s aspiration, quoted in News Ltd newspapers, to get “millionaires’ rates for ordinary mums and dads”. Despite perceptions, Gruen said, millionaires often did not get rates significantly cheaper than those secured by ordinary wage-earners.

    Gruen also questioned whether any banking deal could be a “group buy” given the need to tailor loans to individual borrowers’ characteristics.

    Yesterday, Choice CEO Nick Stace responded to the growing reaction with a blog post. He called the deal inspiring, exciting and “a next-generation consumer campaign” that would “give consumers the best chance of getting the best mortgage deal”. He claimed that “when you rattle a few cages, funnily enough accusations and misinformation begin to fly around.”

    Stace also said that Choice hadn’t been clear enough about its plans, and disclosed that the organisation would receive a fixed fee – presumably a per-loan fee – regardless of which lender One Big Switch selected.

    Choice has been a consistent critic of the major banks; for instance, it was one of the most vocal lobby groups arguing for the controversial ban on mortgage exit fees.

    But Choice has also sought new commercial partnerships in finance and other fields in recent years, as it battles against online competition in its traditional consumer advice space. These partnerships include lead-referral deals with GetPrice and Mozo.

    One Big Switch has been co-founded by Lachlan Harris, a former media adviser to ex-prime minister Kevin Rudd. During Harris’s time there, Rudd’s office was perceived to have formed close ties with Choice and with the broader consumer movement.

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