The investigation can reveal that a harsh business model and remuneration structure is pushing franchisees to cut corners, including churning customers, writing inflated loans to meet aggressive targets and in some cases committing fraud. Mortgage Choice, which has a loan book worth $54 billion, has been making record profits for its shareholders, which include Commonwealth Bank and the founders, the Higgins brothers, who also sit on the board. On Monday, shortly after being contacted by the joint investigation, Mortgage Choice issued a statement to the ASX saying it was reviewing its franchisee remuneration structure. It says the purpose of an “updated remuneration model was to increase franchisee remuneration and reduce franchisee income volatility to allow them to grow their businesses and assist more customers with their home loan needs. Mortgage Choice chief executive Susan Mitchell says the model was “outdated” and needed to be more competitive with the rest of the industry. “It was my first priority when I became CEO two months ago,” she says. Mortgage Choice chief executive Susan Mitchell Credit:AAP

Before becoming chief executive Mitchell was the company's chief financial officer for nine years. In that position she says she dealt with many issues and financial difficulties of franchises. She declined to say how many franchisees were receiving financial assistance or how many had been terminated for misconduct pointing to robust compliance processes. “These changes are designed to support the long term sustainable growth of Mortgage Choice, increase franchisee remuneration and attract new high quality franchisees to our network,” she says. But franchisees remain skeptical and have risked breaching their franchise agreement to speak to Fairfax and 7.30.

One franchisee, Russell Chellew, says some days he finds it hard to get out of bed. “It’s exhausting pretending to be happy, putting on a false face. It takes a lot of effort when internally you are struggling,” he says. Chellew has been battling physical and mental health issues and blames it on Mortgage Choice. “I’m divorced, I’ve had some health issues like sleep apnea and psoriasis, which is a stress-related skin condition, and I’ve battled mental health issues.” In 1999 Chellew bought into an existing franchise business in Ringwood, in the eastern suburbs of Melbourne, and has worked 50-60 hours a week, helping customers navigate their way through the best home loan deal through to settlement. I am in a constant state of anxiety about my performance, how many sales I’ll make each month and what impact it will have on my business. Russell Chellew

Now 55, divorced and living in a small flat in Hawthorn, Chellew is struggling financially and emotionally. “I am in a constant state of anxiety about my performance, how many sales I’ll make each month and what impact it will have on my business and my monthly income,” he says. Chellew isn’t alone. Aurelio Tenaglia, who runs a franchise out of Parramatta in Sydney’s western suburbs, also risks breaching the franchise agreement by speaking out. He helped co-ordinate the 173 disgruntled franchisees and says a class action was put on hold when Mortgage Choice agreed to review the commission structure late last year. Aurelio Tenaglia from Mortgage Choice is speaking out about the unfair remuneration model. Credit:Louie Douvis

“I believe the company became aware franchisees were ready to take action and so they agreed to look at the model so we are in a holding pattern waiting for the outcome,” he says. Before Monday's ASX statement the company had not publicly revealed it was reviewing the model. Trail of problems Mortgage brokers earn their income from two commission streams: an upfront commission, paid by the lender, calculated as a percentage of the size of a new loan they arrange and a trailing commission, also paid by the lender, over the life of the loan to service customers. Brokers say Mortgage Choice's original model was easy to understand with revenue earned on upfront commissions that weren’t linked to trailing commissions.

Then Mortgage Choice changed the rules. It introduced a “performance-based model” during the global financial crisis as a temporary measure to get the business through a rocky period. But it never switched back, putting it out of step with the rest of the industry, and leaving in place a system which makes it harder for franchisees to sell. The model includes a monthly target for new loans of $1.5 million (which is almost one third higher than the industry monthly average). Failure to meet the target means brokers are put on the lowest commission tier for both their upfront and trail commissions. That rate sees Mortgage Choice retain a margin of 74 per cent of the revenue received on the trail commission and brokers are left with the remaining 26 per cent.

Those who beat the target, Mortgage Choice rewards with higher commissions and a higher trailing commission of up to 82 per cent. The model has been set up so that Mortgage Choice wins either way. Tenaglia says franchisee discontent has been rising. Back in 2011 when he became a member of the Franchise Advisory Council, franchisees were struggling. “As I got to know more and more people I realised they were selling their homes, marital breakdowns ... I’ve heard many people confess to me they have thought about taking their lives because they feel like they are a failure in this business.” I feel like a caged animal. I feel like I’m locked up and trapped in an environment where I cannot sell my business to anybody Aurelio Tenaglia

He says Mortgage Choice has been aware of the problems for years. “I feel like a caged animal,” Tenaglia says. “I feel like I’m locked up and trapped in an environment where I cannot sell my business to anybody … I’ve spent 20 years building a business that I was looking forward to pass on to my children.” If he walks away, Mortgage Choice will keep the loan book and the associated trailing commission, leaving him with nothing to show for his years of investment and hard work. Some other broking companies allow brokers to take their trailling commissions with them should they leave. Mitchell says this is unlikely to change when the new model is introduced early in the 2019 financial year. One franchisee I know bought a business where the loan book was fraudulent. Aurelio Tenaglia

Tenaglia says Mortgage Choice has created a situation where franchisees struggle to service existing customers as the remuneration structure emphasises new business by linking trailling commissions to new loan generation. According to Shaw and Partners banking analyst Brett Le Mesurier, when franchisees collect trailing commissions to service clients that they aren’t servicing, it is akin to fees for no service, a practice for which the regulator has pinged the banks and which was also been raised as an issue in the royal commission. Part of the explanation, say a procession of insiders, is that franchisees are financially hurting. “I feel that my colleagues have very high moral standards and ethics but we don’t know what sort of pressure people can be put under when they’re not being remunerated correctly, Tenaglia told the joint media investigation. “One franchisee I know bought a business where the loan book was fraudulent,” he says. That franchisee was contacted by Fairfax and 7.30 and agreed to speak on the condition of anonymity after being threatened by the criminal who sold the business.

The franchisee says within weeks of buying the franchise it became apparent some of the loans were fraudulent. “Full blown creative documentation was involved,” the franchisee says. “Some documents had no IDs, no loan statements and there was evidence of secretaries forging signatures,” the franchisee says. The franchisee says Mortgage Choice was later made aware of the situation. Mitchell says Mortgage Choice was not aware of fraud at the time of sale of any businesses. Scrutiny building It comes as the scrutiny of mortgage broking and franchising has never been greater. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is

Loading examining the conflicts inherent in mortgage broking and a parliamentary inquiry into the franchise sector is looking at franchising following a series of scandals including 7-Eleven, Domino’s, Caltex and Retail Food Group. And there have been a series of collapses including Aussie Farmers Direct, Pie Face and pizza chain Eagle Boys. A telltale sign that franchisees are being squeezed is to look at the proportion of commissions they received. According to Brett Le Mesurier in the 2015 financial year franchisees received 74 per cent of the origination commission paid to Mortgage Choice but in the six months to December 2017, it had fallen to 70 per cent. In revenue terms this is a substantial percentage gain for Mortgage Choice. “The actual commissions paid to each franchisee can vary widely from the average,” he says. Chellew warned head office about the growing franchisee discontent last November – shortly after the group’s annual general meeting where it suffered the ignominy of a fourth so-called strike from shareholders in as many years over executive pay. Cabcharge is the only other company to receive four strikes.

In a letter to Mortgage Choice, Chellew told them that franchisees were hurting badly and “the ‘Mortgage Choice family’ that was once envied is now a distant memory.” He reminded them "nothing hurts more than a broken family and that is the situation Mortgage Choice is coming to.” He says he felt sick to the stomach writing the note, but it had to be done. In an Australian franchise sector estimated to be worth $146 billion in sales, and where there are four times as many franchisors per head here as in the United States, Mortgage Choice has become a serious player. Since it listed on the ASX in 2004 at $1.05 a share, Mortgage Choice has produced record or near record profits and large dividend payouts for shareholders every year.

Brothers, Peter and Rodney Higgins founded Mortgage Choice. Credit:Patrick Cummins Its major shareholders include Commonwealth Bank and company director Rodney Higgins who co-founded the business in 1992 with his brother Peter, who also sits on the board. Franchise Redress, an assistance and support business run by Maddison Johnstone and Michael Fraser for disaffected franchisees, spent days on the road and on the phones talking to Mortgage Choice franchisees in May. “When you look at the business model it seems they’re taking a lot more than a normal franchise system would and it treats franchisees like they’re a sales person and have to sell, sell, sell for a tiny reward. The model is unfair,” Fraser says.

He says some franchisees confirmed the model had pushed some desperate brokers to do the wrong thing. “There are a lot of desperate people out there who are hurting and walking away from their business because they can’t do it anymore,” he says. A common complaint among franchisees is the model is unforgiving of the economic environment, the geography or tightening lender credit policies. Franchisees in Western Australia says a prolonged downturn in the local economy had negatively impacted their business, making it difficult in some areas to meet targets. Leon Azlin is still reeling from a series of catastrophes in his area. Azlin opened a Mortgage Choice franchise in Churchill in eastern Victoria seven years ago. Churchill has a population of 4568 at the 2016 census and is part of the Latrobe City local government area where the average loan size is $180,000, which makes it hard to reach the $1.5 million minimum monthly target to qualify for a higher commission.

Company co-founder Peter Higgins Credit:Edwina Pickles Over the years Azlin has tried to sell the business but couldn’t find a buyer. He also tried to diversify but was unable. Loading Then on September 8, 2017 Mortgage Choice wrote a letter titled “Without Prejudice Offer to Terminate Franchise Agreement” after failing to meet the minimum performance standard. Mortgage Choice gave him less than a month to accept the terms, including terminating the agreement, removing all Mortgage Choice signage in return for $12,500. He was flabbergasted. He wrote back to Mortgage Choice outlining a series of reasons for the failure to meet targets and grow his loan book.

They included the worst coalmine fire at Hazelwood in the state’s history, which affected thousands of people for months, then in 2017 the Hazelwood power station closed which resulted in 850 job losses as did the Carter Holt Harvey sawmill, which saw another round of redundancies. The Hazelwood mine fire coated the area in smoke. Credit:Keith Pakenham In the letter Azlin accused Mortgage Choice of failing to support him despite repeated requests for help. “If our business franchise manager was prepared to meet us it would have allowed the opportunity to see and experience firsthand the difficulties we face,” he wrote. Unable to afford lawyers, his correspondence and their responses were channeled through Mortgage Choice’s external lawyers. His departure was meant to be May 31, but it came and went. Now he is playing a waiting game. Aurelio Tenaglia likens the franchisee relationship with Mortgage Choice to Stockholm syndrome. “We are kidnapped in a way that we love what we do but we are trapped. If the franchisor makes a decision that we’re not happy with there is no ability to make any significant change,” he says.