Just imagine you’re a waiter in a restaurant. You’re paid $25 per hour and rack up a forty hour week. Tips are split between all staff. Now imagine if your boss informed you last night that by July next year you would be receiving a 19% pay cut.

You spring into action. You ring all of your network of restaurant owners to try and arrange alternate employment only to discover the 19% cut applies across your entire industry. Not only that but there is a good chance that your entire salary is at risk as the industry transitions to a user-pays model within three years. That means you may have to survive on tips alone.

What would you do?

Your options are to work 19% longer hours now and 400-500% more in three years time (that’s 192-240 hours per week – which by the way is impossible) or Leave the industry. I’m guessing eventually most people would look to exit the industry.

That’s the dilemma facing mortgage brokers this week. Commissioner Hayne released his final report on Monday and effectively recommended that brokers be paid by borrowers not lenders as is currently the case.

According to an MFAA survey your average broker in NSW writes around $13m of new business per annum. That means they receive $84,500 of up-front commissions plus GST as well as 0.15% of trail commission plus GST. For the sake of simplicity, let’s assume every single loan attracts 12 months of trail – so $19,500. That’s a total of $104,000 annually. There is no other income. If the broker doesn’t originate they don’t get paid.

Remember the above is an average so half of the 18,000 brokers earn less than that and these numbers are revenue before costs (like rent, IT services, telephone, transport, etc,) are taken into account.

Hayne is recommending that trail commission be severed immediately. This means the average broker will receive a $19,500 pay cut. Treasury has recommended this be adopted by 1 July next year.

Hayne has further recommended that all commission be paid by the borrower in future. The reason for this, he maintains, is so there is no doubt for whom the broker is acting. It’s this reason that sticks in the craw of every single broker and it demonstrates Hayne’s complete lack of understanding as to how 99% of brokers operate.

As nearly all bank lenders pay the same rate of commission I don’t understand why the above is an issue.

So, after taking a 19% pay cut next year, brokers will then have to take the risk that in three years time borrowers will be happy to pay their commissions instead of the lenders.

As an overwhelming majority of borrowers recently surveyed said they were unwilling to pay brokers themselves…you can see where this is going.

Some astute readers will have thought the above example is a little light on. You’d be right. However, you have to remember the following:

On average, each vanilla mortgage takes around 20 hours to process. We recently settled one that had taken over 100 hours. From a cost perspective we lost money on that transaction (just the transport costs were over $300 – never mind the rental etc). But it’s not just about the money particularly when home owners stand to lose large chunks of money if we don’t do our jobs.

If the average size of loans in NSW is around $500k that means the average broker is writing only 27 loans per annum. That would appear to tell me that the average broker only works 540 hours per year or 10 hours per week. So what do they do the rest of the time. Most time is spent meeting with clients who (for various reasons) can’t or don’t proceed to an application.

The rest of the time is spent trying to build their businesses (either online, via referrers, cold calling or other type of marketing). To achieve success a lot of money spent hiring third parties to assist in this process – including marketers, lawyers, IT professionals and others.

A lot of time is also spent on ensuring compliance of every single loan and maintaining an up-to-date knowledge of the industry (via seminars, courses, meeting with existing and new lenders etc).

Fortunately, some of us have diversified our businesses. Some work part time in menial jobs to supplement the uncertain income which they receive currently (brokers are not salaried – their entire income is commission based). But most will simply leave. Many will apply to Centrelink for assistance. A small number will swallow their pride and return to banking. Those with staff will be doing the numbers this week and most staff will be let go eventually. Those using outsourced services in the Philippines and India will also eventually terminate their agreements.

What happens to 60% of borrowers who utilise the services of 18,000 brokers?

I see a future where the major banks hire more salaried staff. Their cost to income ratios start to rise and an eventual return to brokers transpires as equity analysts batter bank CEOs for a higher cost base. But that’s probably four-five years down the track. In the interim, as more brokers leave the industry lending will slow down as banks’ legacy systems and current staff levels struggle to cope with the increased manual processing.

The four major banks will then increase their dominance as second tier lenders struggle to distribute mortgages without brokers.

The lack of liquidity in the system will lead to a significant economic event.

For me…there’s no turning back. I worked for banks for thirty years and except for my final role, I really enjoyed it. I get a kick out of helping businesses and people in general navigate through the minefield that is borrowing.

I’ll be continuing to do what we’ve done for the last four years. Business as usual. Sure, we’ll make 19% less on mortgages but in this high-risk game you have to back yourself to compensate for that loss with additional or other business. However, if the Labor party decides to strictly adhere to Hayne’s recommendation to adopt a complete user-pays system we simply cannot continue to offer a mortgage service. The costs would simply outweigh the income.

I’m not surprised that the recommendations by Commissioner Hayne – if adopted in full – will all but wipe out brokers while beating the banks up with a feather duster – if you doubt that look at the banks’ share price this morning. If you expected the opposite you were dreaming. The systemic risk would have been too great.