Make business happen

The trend is manifestly obvious: mortgage advisers are originating more and more of the major banks' mortgages - and there's little reason to expect that will change.

Back a decade ago, it was a matter of guesswork; the banks weren't disclosing data and so we argued: did advisers account for 30% of origination? Or 35%? Or more?

We did know that advisers in Australia accounted for about 50% of origination back then.

There are differences between New Zealand and Australia: our neighbour to the west is more than five times larger and didn't suffer the mass-scale collapse of finance companies in the noughties that New Zealand did - and its non-bank sector had already been much larger than New Zealand's even before those collapses.

But the many similarities, including similar legal frameworks and shared attitudes towards home ownership, and the fact our big four banks are owned by Australia's big four banks, suggest that the New Zealand market

TMM looks how high is the market share? And is it due to incompetence on the part of the banks or other factors such as new regulation? will continue to follow the same path as Australia's as far as the rise and rise of mortgage brokers goes.

According to the Mortgage and Finance Association of Australia, brokers hit a record of originating 71.1% of mortgages in that country in the September quarter last year, before falling back to 69.3% in the December quarter and regaining a little ground to 69.6% in the March quarter.

By the numbers

Three of the four major banks now publish more information than they used to, though it could be improved.

ANZ Bank New Zealand and National Australia Bank-owned Bank of New Zealand provide the most information.

ANZ revealed advisers accounted for 57% of new mortgages in the six months ended March, while advisers accounted for 43.8% of BNZ's new mortgages in the same period.

Westpac didn't provide this information but did say advisers had originated 51.1% of its entire mortgage portfolio at March 31.

Since the equivalent figure for ANZ was 48%, it appears reasonable to assume the new mortgages figure for Westpac could be even greater than ANZ's.

BNZ, of course, is famous for trying to make a virtue out of its previously poor relationships with advisers by deciding in early 2004 that it would refuse to deal with them at all; at that point, brokers had been writing only about 5% of BNZ's mortgages.

By 2015, after it became clear advisers were here to stay, and that refusing to deal with them meant missing out on business and losing market share, BNZ did an about face.

But that legacy is why, by March 31, brokers still accounted for only 32.7% of its mortgage portfolio.

Commonwealth Bank of Australiaowned ASB Bank has a different balance date: June 30 versus Sept 30 for the other three.

It hasn't disclosed its figures, but has a long history of supporting advisers, particularly since they were a key part of its strategy for moving out of its home market in Auckland.

“Our proportion of adviser-arranged mortgages is in line with the rest of the industry,” ASB told TMM.

“We have good relationships with our adviser community and recognise the importance of the role they play,” it said in a statement, citing a recent survey of mortgage advisers which rated it as “the best bank for processes and systems.”

What about the smaller banks?

As for the smaller banks, TSB refused to answer any questions at all relating to mortgage advisers, on the grounds that “this is commercially sensitive information.”

The truth of this is dubious in light of how much information the other banks were willing to disclose.

Kiwibank chief executive Steve Jurkovich was recently quoted as saying about 55% of its new mortgages in the six months ended December were originated by third parties.

“I don't see any reason why we might not wake up one day and that's 85%,” Jurkovich said.

The government-owned bank says about 20% of mortgages by value were originated by independent advisers in the last 12 months, with the remainder of third-party-originated loans written by the Kiwibank-owned New Zealand Home Loans.

“We are continuing to see growth in this [independent adviser] channel as we have put more focus on it over the last 12 months,” Kiwibank said.

While Kiwibank was founded in 2001, it didn't reach sufficient scale to start working with mortgage advisers until about a decade ago – it is now New Zealand's fifth largest bank – but it says it's only in the last two financial years that it has made the channel a major focus.

Kiwibank now works with about 380 advisers and has about another 140 in the pipeline.

The trend explained

So, what explains the trend, and is Jurkovich right about the likely future?

Massey University banking professor David Tripe has the bluntest of answers: “It's a reflection of the laziness and incompetence on the part of the bank branch networks.”

He notes many advisers come from a banking background, with mobile mortgage managers in particular being attracted to the other side of the fence for entirely pecuniary reasons.

That's because regulatory changes have meant banks can no longer pay staff volume-based commissions.

And bank branches these days don't have qualified staff available, largely because that wouldn't be economic.

“You would have to have somebody in a branch who is competent on a more or less full-time basis - and they wouldn't have enough to do to keep them busy,” Tripe says.

Given increasing regulation and higher education standards for advisers, “probably by now, most of the ratbags in the mortgage sector have been rooted out.”

For ethical reasons, it's probably better for advisers to establish relationships with other professionals in the housing sector, including real estate agents, than for banks to try to do this themselves, Tripe says. “Advisers have got some marketing advantages in that regard.”

KPMG partner John Kensington is more sympathetic to the position the banks are in – he is obviously close to the sector because KPMG is the auditor of ANZ Bank NZ, TSB, Co-operative Bank and SBS Bank.

Kensington says one factor driving people to engage advisers is that the average level of financial literacy among New Zealanders “is not that strong. I suspect in these tougher times, they're needing all the help they can get.”

New rules partly responsible

The difficulties banks have had in navigating the changes to the Credit Contracts and Consumer Finance Act (CCCFA), which came into force in December 2021, have also played a part in driving customers to advisers, Kensington says.

While the CCCFA regulations have been refined several times since then as politicians tried to iron out the unintended consequences – it had been targeted at marginal predatory lenders but instead had imposed onerous requirements on mainstream banks – they still make it more difficult for banks to grant a mortgage application.

Kensington suggests people who are unsure of whether they qualify for a mortgage are more likely to engage an adviser.

“A mortgage adviser is probably not going to allow you to put a poor proposition to a bank. They're going to help you clean it up,” he says.

“The banks are probably seeing a better quality of application than if the applicant hadn't used a mortgage adviser.”

The rapidly rising interest-rate environment has also made banks more cautious, Kensington says. The Reserve Bank has raised its official cash rate from 0.25% in October 2021 to 5.5% currently.

Kensington doubts banks will ever stop writing mortgages directly.

“What's distinguished the market for a period of time has been their ability to raise capital. They have tremendous mechanisms for going out and getting enormous amounts of money and then they have the say in how to distribute it [to borrowers].”

Even where non-banks are now participating in the mortgage market, it's usually via bank funding, he says.

That's rather than non-banks trying to raise money from selling debentures. The debenture market was severely tarnished by the wholesale collapse of finance companies more than a decade ago, and is much smaller these days.

“You might see the indirect funding through those [non-bank] vehicles increase a bit over time,” Kensington says.

Squirrel chief executive David Cunningham, who was Co-operative Bank's chief executive until mid-2021, says changes in the rules for providing financial advice have played a major part in the recent growth.

“Now, you really need to be a FAP [financial advice provider licence] holder and you need Level 5 [of the New Zealand Certificate in Financial Services] qualified advisers,” Cunningham says.

Since mid-March, only those with Level 5 can provide financial advice.

“That's meant an overall reduction in the capability that banks are able to bring to the table - most banks haven't gone down the route of their home-loan specialists becoming Level 5-qualified,” he says.

Banks’ expertise is in “manufacturing” mortgage products, now providing information but not advice, and customers have been voting with their feet by engaging with brokers, Cunningham says.

What say ye, banks?

But what reasons do the banks themselves give for the growing dominance of mortgage advisers?

Westpac's consumer banking and wealth general manager, Mike Norfolk, suggests the lockdowns associated with Covid accelerated the trend.

“The most important thing for Westpac is that our customers have a variety of channels they can use to access our services,” Norfolk says.

“Mortgage advisers will appeal to some customers, while others will prefer to forge a direct relationship with our banking team and benefit from their deep knowledge of our products.”

BNZ specialist banking general manager Adam Ward attributes the growth to increasing regulation, which is prompting customers to seek independent advice and assistance.

“The trend reflects the unique strengths of both brokers and banks. Brokers are highly geographically dispersed across NZ, flexible and work across a range of lenders,” Ward says.

“BNZ welcomes the competition and choice that brokers bring to the home loan market.”

Co-operative Bank's chief product officer, Jon Armour, also points to the CCCFA changes bringing added complexity to applying for a home loan.

“Borrowers are potentially seeking our perceived independent 'experts' to help them navigate the process.

“Also, with the dynamic market conditions, borrowers may have relied more heavily on brokers to 'get the best deal’, given rising house prices and loan requirements and now increasing interest rates,” Armour says.

Kiwibank, too, cites the substantial amount of regulatory changes - in particular, the requirement for independent advisers to gain educational qualifications.

“We think this has impacted the reputation of advisers and helped the independent adviser industry gain a better level of professionalism,” says Nicole Pervan, Kiwibank's home lending general manager.

“New Zealand is also seeing an increased level of financial literacy across our population, so people are choosing to seek our more independent advice [than] in the past,” Pervan says.

“Buying a house will be, for many people, the biggest single output within their lifetime, so they are choosing to seek out independent advice to help them get the best deal.”

With house prices so elevated, requiring larger mortgages, the need for more advice becomes more acute.

Pervan rejects the suggestion that the trend highlights deficiencies with the banks.

“We would argue definitely not,” she says.

“Some customers prefer independent advice and the added convenience of having an adviser do the shopping around for them.

“This is convenience for the customer rather than a deficiency on behalf of the bank,” she says.

“Our in-house advisers are just as capable and professional as independent advisers, and ultimately we will support our customers however they choose to bank.”

Massey University's Tripe notes that banks appear to be putting less emphasis on their in-house mobile mortgage mangers these days, but that's not what the banks themselves say.

Pervan says Kiwibank has made no changes to its numbers of mobile mortgage managers compared with independent advisers.

ANZ Bank says its mobile mortgage managers “are hugely valuable to ANZ. Home lending has become increasingly complex and our mobile teams are experts in this area, focusing solely on home loans.”

ASB says it has slightly increased its number of mobile mortgage managers in the last five years and says they're “still very popular with customers.”

It's probably unsurprising that the banks reject the idea of handing over mortgage origination entirely to brokers.

“We can offer customers a personal, integrated proposition which goes far beyond home loans.

“Buying a home is an important life moment for customers, and one that we will continue to focus on making better for customers over the long term,” says ASB.

Kiwibank's Pervan says it seems unlikely at this stage that banks would bow out of mortgage origination.

“We see future technology development and open banking improvements coming down the pipeline, which will continue to disrupt and evolve how banks bring business to customers,” Pervan says.

“Mortgage origination will continue to evolve and adapt to where our customers want to be operating.

“But we still see great value in having a balanced portfolio with different origination options to serve our customers.”

BNZ's Ward says “we highly value our proprietary business,” but that having brokers as part of the mix creates “a model that leverages the strengths of both, [which] can offer the best of both worlds.” ✚