Brokerage model comes under scrutiny

In the latest episode of Broker Daily Uncut, host Alex Whitlock spoke with Momentum Markets co-founder Phil Tarrant about the resurgence of this broking model, saying that it can undermine broker credibility and threaten long-term business sustainability.

The discussion comes amid a number of brokerages adopting the model, offering upfront cashback linked to loan balances and rebates on trailing commissions.

Tarrant said the proposition of giving back part of the upfront or trail commission as a competitive advantage “raises alarm bells.”

He questioned the long-term economic viability of offering cashback to clients, noting that the model relies heavily on volume and leaves broker businesses exposed when approvals slow or conversion rates deteriorate.

Tarrant said, “Generating mortgages through clever marketing plays, for example giving back up parts of your upfront or parts of your trail, I’m struggling to see how models like that are going to be moving forward because I just don’t think the margins are in it from an economics of mortgage broking point of view. And there’s a big question mark for me around it.”

Tarrant added that the practice is more likely to attract high volumes of transactional clients, rather than the long-term relationships brokers work hard to build, with customers quick to move on when a better deal emerges.

“Think about the type of customers or clients you’re going to attract. If your messaging and your marketing is, ‘I’ll do this work for you and I’m going to give you money back’, I would say those customers are probably pretty flighty and they’ll bounce around to the next best deals,” he said.

“I just can’t see the margins in there, to be able to service all those customers effectively.”

While cashback models of broking are back on the agenda, they are far from new.

In 2004, a similar concept was used by Refund Home Loans, which paid refunds to clients who completed a mortgage within a certain time frame.

After rising to prominence and growing to around 350 franchisees, Refund Home Loans entered voluntary administration in 2011.

“It’s a model for brokerages to get an edge,” Whitlock said.

“And there’s plenty that do it for charity, which is a bit of a different proposition… But I was interested just to see a broker business marketing itself openly to the public, saying they are refunding or giving away commissions.”

Whitlock and Tarrant agreed the model could have broader structural implications for the broking industry, with commission refunding sending a clear and potentially damaging signal to borrowers that broker advice has little intrinsic value.

While cashback offers may appeal to price-sensitive consumers, they risk repositioning brokers as interchangeable middlemen, rather than trusted professional advisers.

“I have a very deep-seated fear of any kind of proposition around refunding payments that brokers receive,” Whitlock said.

“For me, it goes a long way to damaging the broker proposition.

“It’s not just as simple as saying, ‘Oh, we make so much money, we can give it away’. There’s a huge lack of understanding at a consumer level about what brokers actually do.

“They don’t conceptually grasp that brokers do an awful lot of work for nothing and are only paid upon success.”

[Related: Brokers unpick efficacy of new guarantee]