ING DIRECT Commission Review 16 July 2008
Commission Review Following several weeks of extensive consultation with preferred aggregator and broker partners, ING DIRECT has reviewed its commission structure. The review is a direct result of sustained margin compression having been experienced over a number of years. This margin pressure is due to several factors including: - Increasing levels of competition in the Australian home loan market - Shorter loan life - Declining conversion levels driving increased operational costs The new commission structure will be simple and straightforward to follow, competitive, and will reward our aggregator and broker partners based on volumes and conversion levels. The structure is illustrated below and will apply at an aggregator level: Upfront Annual Settlement Volume to ING DIRECT Base of 50 bps + <$25m >= $25m and < $100m >=$100m and < $200m >=$200m < 50% - 2.5 bps 5 bps 7.5 bps Application to Settlement Conversion >= 50% and < 60% >= 60% and < 70% 2.5 bps 5 bps 7.5 bps 10 bps 5 bps 7.5 bps 10 bps 12.5 bps >= 70% 7.5 bps 10 bps 12.5 bps 15 bps The new structure for upfront commissions will be effective from 1 January 2009. An interim structure will be in place from 1 October 2008 to 31 December 2008 whereby all settlements during this period will receive a flat upfront commission rate of 65 bps. Volume and conversion performance will be measured on a quarterly basis. This performance will then be used to determine the following quarter s upfront commission payments, as illustrated below. Applications over 6 months that have settled as of the current date Conversion is calculated on the basis of applications over a six month period (three months in arrears) that have settled up to the time of measurement. Settlement volume is calculated over 12 months 1 Jan 1 Apr 1 Jul 1 Oct 1 Jan 1 Apr Based on these measurements, the upfront rate is set for the next quarter. 2
Trail Year 1 Year 2 Year 3 Year 4+ 15 bps 15 bps 15 bps 20 bps New trail structure will be effective from 1 October 2008. Clawbacks - 100% on loans closed within the first 12 months - 50% on loans closed within months 13 to 18 ING DIRECT reserves the right to clawback upfront commissions on loans that enter 60 day arrears within 6 months of settlement. New clawback structure will be effective from 1 October 2008. Key Dates New TRAIL & CLAWBACK structure Current commission rates Interim UPFRONT structure (65bps) New UPFRONT structure 1 Oct 2008 1 Jan 2009 3
FAQs Like all lenders in Australia, ING DIRECT s mortgage business has experienced continued margin pressure over a number of years. In order to reduce costs to the business, we have been actively improving efficiency levels, without compromising the customer or broker proposition. To maintain our competitive offering, we review all aspects of our business on an ongoing basis, including commission structures. An announcement has been made regarding changes to our broker commission structure following recent consultations with our valued aggregator and broker partners. For full details, please refer to the below FAQs. If ING DIRECT is a branchless bank, why have you restructured broker commissions? ING DIRECT s mortgage business has experienced continued margin pressure over a number of years. Not maintaining a branch network may reduce costs however we also don t derive any profits a branch network enjoys. Restructuring commission levels has become necessary and will allow ING DIRECT to continue offering value-for-money mortgage products whilst not compromising our broker and customer service proposition. The restructure is also necessary to ensure the long-term viability of the third party distribution channel. When will the new commission structure become effective? Changes to our upfront commission structure will occur in two stages. Loans settled between 1 October 2008 and 31 December 2008 will receive 0.65% of the settled amount as an upfront commission. Loans settled on or after 1 January 2009 will receive upfront commissions according to the new performance structure. New trail commission rates and clawback provisions will apply for loans settled on or after 1 October 2008. Did you consult the broker industry prior to announcing the commission restructure? The changes have been made after extensive consultation with our preferred aggregator and broker partners. We have taken on board ideas and suggestions, particularly the common themes of needing to be competitive, fair and simple to follow. ING DIRECT prides itself on being a true supporter of the intermediary channel. We believe that our branchless bank model, value-for-money mortgage products and industry leading broker and customer satisfaction levels are testament to our commitment to the long-term future of ING DIRECT and the intermediary channel. You say the changes are simple to follow. How is this so? A straightforward commission structure will apply going forward, focussing on volumes and conversion levels. There are no complicated formulae to determine the applicable commission level. Will my existing portfolio be affected by the new trail commission rates? No. Changes to trail commissions will only apply to loans settled on or after 1 October 2008. 4
Will commission rates vary according to product? No. The same rate of commission will apply across all ING DIRECT mortgage products, both residential and commercial. Will all aggregators be treated equally? All aggregators with ING DIRECT introducer agreements will be subject to the new commission structure. Will your conversion measure include pre-approvals? Yes. For the purposes of calculating conversion rates, all applications submitted to ING DIRECT will be taken into account. How will conversion ratios be measured and applied? Conversion ratios will be measured quarterly based on six-month s worth of applications, with a minimum 3 full month lag for settlements (including pre-approvals). This ratio will then be used to determine upfront commission for the following quarter. How will settlement volumes be measured and applied? Settlement volumes will be measured quarterly, based on settlements over the previous 12 months. This figure will then be used to determine upfront commission for the following quarter. Will clawback changes apply only to deals written under the new commission structure? Yes. If I increase an existing loan account on which I currently receive a trail commission, what rate of commission will apply? For increases to loan accounts settled before 1 October 2008, the rates of trail and upfront will be paid at their original commission rates. If I arrange for a substitution of security on or after 1 October 2008, what rates of commission will apply? If the substitution can be accommodated via our portability process, the rates of trail and upfront will be paid at their original commissions rates. Otherwise, new commission rates will apply. If I arrange for a switch of an existing loan account to another product, what rate of trail commission will apply under the new structure? There will be no impact on trail commission. If I arrange for a switch of an existing loan account to another product and also increase borrowings, what rates of trail and upfront commissions will apply under the new structure? New trail commission will apply. An upfront commission will also be paid at the new rate on the increase amount and the new clawback provisions will apply to the new upfront. 5
What impact will changes to borrowers on existing facilities have under the new commission structure? Any additions or removals of borrowers to existing facilities will be treated as new loans and new commission rates will apply. Do the commission changes also apply to commercial loans? Yes, the commission changes will apply to both residential and commercial ING DIRECT loans. ING DIRECT has terminated my direct accreditation. How can I refer mortgage business to ING DIRECT? From 1 October 2008, you have the option of obtaining membership with one of our accredited aggregator partners if you wish to refer loans with ING DIRECT. A list of accredited aggregators will be available on request from your ING DIRECT State Manager. Will commission payments revert back to the old structure should the current liquidity problem improve? Whilst we cannot comment on what the future holds, it is important to note margin compression is a long-term event and separate to the funding issues caused by the credit crunch. Do stated commission rates include GST? No. Commission rates are stated ex-gst. Where can I get more information? Your Business Development Manager will be able to address further queries. This information is current as at 16 July 2008 and subject to change. 6