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Shoeshine: BNZ baulks at brokers' free lunch

Friday 30th April 2004

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This week's "war of words" between Bank of New Zealand and Mike Pero Mortgages might seem like a storm in a teacup but underlying the spat are issues that are exercising the entire financial services industry.

The fuss was sparked by a print and television advertising campaign in which BNZ claimed to be able to offer mortgage borrowers a "great" rate because it had cut out brokers.

The campaign hit a huge nerve with Mike Pero because it started just as he was about to kick off a national roadshow promoting his company's initial public offering and NZX listing.

He immediately accused BNZ of "a very cynical smear campaign and attempt to undermine Mike Pero Mortgages' share offering."

BNZ said it wasn't even aware Mike Pero Mortgages was floating when the advertising campaign was decided on. The start date was set as the first anniversary of the decision, on May 2, 2003, to stop using mortgage brokers to distribute its products.

The campaign also provoked a response from the Mortgage Brokers Association, which speculated that it was prompted by BNZ feeling it was "missing out on reasonable volume" because of its dismissal of brokers ­ who, the association said, now arrange 30% of new loans.

That claim flies in the face of another broadside from Pero, who reckoned BNZ, in its last year using brokers, only wrote 2% of broker business.

One interesting wrinkle is that BNZ's parent, National Australia Bank, is one of Australia's most enthusiastic supporters of the broker channel.

BNZ's stance demonstrates if nothing else that BNZ's management doesn't always have to march to the tune dictated by Sydney.

And its decision doesn't put it conspicuously out of step with the worldwide trend, even if some brokers would like to give the impression it does.

Kiwibank, for example, doesn't use brokers and has said it would like to see them accepting lower commissions before it will consider starting.

In the US, according to Ross Butler, the chairman of broker Mortgage Link, some fairly large banks distribute entirely through their own channels.

In the end the debate, as in the financial planning and investment industry, is about costs and where they fall.

BNZ and Kiwibank argue that whether a mortgage is sold through a broker or through the banks' own channels, there is a cost that will always end up being borne by the consumer.

Mortgage Link's Butler agrees. Irrespective of which way a client deals with a bank, he says, there is a range of costs and charges that the client inevitably bears.

The implication is that brokers should not advertise their services as being "free." Mortgage Link recently decided not to use the word in its advertising. "Clients these days are smart enough to know that nothing is free," Butler says.

Pero thinks not. His company, he pointed out, could match the "broker-free" rate advertised by BNZ.

Brokers, he argues, offer the lender the means to market their products and take on new business without incurring additional marketing and staff costs, so it's a "win-win-win" situation.

Butler partly agrees with that line, but says it's still very useful to brokers to have a strong, recognised brand to sell. And someone has to bear the expense of all that brand marketing.

The Mortgage Industry Association of Australia has submitted to the Australian Securities and Investments Commission draft advertising guidelines for its broker members.

The guidelines warn brokers to be careful about using a variety of terms, "free" among them.

"Although the service is "free" in that the customer isn't paying the broker any money, there may be a connotation to some customers that no cost is attached to it at all," says the association's chief executive, Phil Naylor.

"But the customer will be paying fees to the bank, which ultimately funds the loan."

Another factor in BNZ's decision to cut out brokers was increasing costs as higher up-front and trailing commissions were expected or demanded, a tendency of which Kiwibank also complains.

Until now these have been absorbed by the banks. Some have charged the client a fee, which it would pass back to the broker.

But if no fees are charged to the client, the costs have to go on to the margin built into home loan rates, particularly for fixed rate mortgages.

And some brokers' propensity for "churning" business in an effort to generate more up-front commissions, BNZ argues, adds time costs and inconvenience for customers.

Questions about how brokers contribute to the expense of offering the products they sell, and about how they are paid, are also being asked in the wider financial services industry.

There are those among insurance companies, which not only generate products such as unit trusts and insurance policies but spend big sums promoting their brands, who feel brokers "free-ride" on insurers' expense lines and should be made to generate their revenue by charging investors fees rather than relying on commission from product providers.

And like some banks, they complain of brokers' incentive to churn business to generate more upfront commissions.

None of this should give anyone the impression Shoeshine has a beef with mortgage brokers. He has twice used Approved Mortgages and got a service for which he would have been happy to pay a fee.

He also suspects Joe Blow public couldn't care less whether intermediaries call themselves "free" or not. In the long run, those who provide their customers with good service will prosper, and those that don't will find themselves with no business.

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