NAB’s former general manager of broker platforms reveals how UK brokers survive without trail commissions.
Australia is the only country in the world that pays its brokers a trail commission, and given the recent reintroduction of first-year trail by major banks NAB and CBA, this looks set to continue for the foreseeable future.
But in the UK, the popularity of fixed-rate mortgages means brokers receive upfront payments approximately every two years, according to Steve Weston, Barclays chief executive, mortgages.
In the UK, upfront commissions – known as procurement fees – average 0.35 per cent with a variance of +/- 0.05 per cent.
However, that doesn’t tell the whole story, Mr Weston says.
“To understand the economics of intermediary-sourced business you need to understand the difference between a mortgage and a product in the UK,” he said.
Customers will take a mortgage for a 25- or 30-year term, just as they do in Australia. The most popular product options currently are two-year fixed rates.
“At the end of the product term the customer rate typically reverts to a higher rate until the customer chooses a new product – referred to colloquially as a 'rate switch' – with their existing lender or refinances to another lender,” Mr Weston said.
“Some lenders pay the broker a fee for completing the rate switch or the broker will be paid a procurement fee by the new lender for a refinance,” he said.
In addition, UK brokers have diversified their income streams.
“Cross selling a broader range of products, including life and general illness, forms a larger part of their business,” Mr Weston said.
“These products pay commissions for both origination and renewals,” he said.
“If Australian aggregators wanted to look at one thing that UK aggregators have done I would suggest it is the way in which they have diversified their income streams.”