Headwinds increasing for third-party channel: Morningstar

In a research note this week, Morningstar analyst David Ellis considered the implications of a number of "industry headwinds" on the growth of Mortgage Choice, which recently announced record loan approvals for the three months to 31 March.

While Mortgage Choice saw a 4 per cent increase in mortgage approvals over the quarter, Morningstar notes that the group has been unable to increase its share of home loans in recent years, suggesting that it has “lost market share in mortgage broking”.

“Industry headwinds are increasing,” Mr Ellis said, pointing to the ASIC and Sedgwick reviews and APRA’s lending curbs. He added that the federal government’s new bank levy also increases uncertainty around future loan growth rates. Changing appetites among the big banks are also a concern.

“Changes in mortgage distribution strategy by Australia’s two largest mortgage banks CBA and Westpac will over time likely slow the growth rate of home loans sourced through brokers,” Mr Ellis said.

“A potential outcome for Mortgage Choice and the broking industry is lower commissions paid to brokers. A review into mortgage broker remuneration by ASIC, released in March, claimed the standard commission model of upfront and trailing commissions ‘could encourage brokers to place consumers in larger loans, even when this may not be in the interests of the consumer’.”

Morningstar said the combined impact of the ASIC inquiry and Sedgwick report have pressured Mortgage Choice’s share price.

However, a number of positive developments in the last few weeks suggest the strength of the broker channel shows no signs of abating. The latest industry data for the March quarter shows broker market share increased to 53.6 per cent of new residential mortgages over the three months to 31 March, up from 51.9 per cent during the December quarter.

HSBC’s recent return to the broker market after a 10-year hiatus is also a strong indicator of the channel’s strength, despite ongoing uncertainty around commission structures.

[Related: Global bank's broker play informed by overseas markets]