Tag: CIF

CIF to propose ‘customer first duty’ for brokers

The Combined Industry Forum has agreed “in principle” to extend its good consumer outcomes requirement to incorporate a “conflicts priority rule” as a “customer first duty”, via The Adviser.

In its interim report, released on Monday (27 August), the Combined Industry Forum (CIF) stated that throughout 2018, it has been considering ways to build upon its good customer outcomes reforms published in its response to the Australian Securities and Investments Commission’s (ASIC) review into mortgage broker remuneration.

In its review, ASIC noted that a broker would satisfy the requirement if the “customer has obtained a loan which is appropriate [in terms of size and structure], is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”

However, the CIF has proposed that the provision could be extended to include a “conflicts priority rule”.

“The ‘conflict priority rule’ could be formulated as a requirement for the customer’s interests to be placed above the providers, or those of their organisation, based on the information reasonably known to the provider, at the time of providing the service,” the CIF noted.

“The effect of this approach would be a requirement to place the customer’s interests first. The combination of the good customer outcome definition and a customer first duty allows both an easy to follow principle – put the customer’s interests first – and structure to follow for brokers when assessing loan suitability.”

The CIF added that further governance metrics could be built for “monitoring and oversight”.

However, the CIF acknowledged that the development and application of the customer first duty is “multifaceted and complex”, noting that “there may be unknown impacts”.

“These include the potential for limiting access to credit, and a disproportionate impact on smaller and regional lenders if lender panels require rationalisation,” the CIF continued.

The CIF noted that it had “not yet settled on a final position”, but claimed that the reform should be underpinned by the following principles:

  • placing the customer first, and having ‘good’ consumer outcomes at the centre of its approach
  • fit-for-purpose for the mortgage broking industry, considering the nature of services provided, the form of conflicts of interests inherent to the industry, the current evidence of risks to customer outcomes, and considering the current regulatory framework
  • promoting competition, and ensuring that no part of the value chain is unfairly disadvantaged
  • all parts of the value chain will have a role to play to support the implementation and monitoring the customer duty
  • providing transparency for all participants, and
  • promoting simple, achievable solutions. Finally, the CIF is aware that there is merit in moving a customer first principle from an implicit expectation, to an explicit statement that a customer and mortgage advice provider can easily understand.

The CIF concluded that it is “aware that there is merit in moving a customer first principle from an implicit expectation, to an explicit statement that a customer and mortgage advice provider can easily understand”.

The report also outlined CIF’s progress in implementing other reforms proposed in its response to ASIC, which include the standardisation of commission payments, the removal of bonus commissions, the removal of “soft dollar payments”, and the drafting of the “Mortgage Broking Industry Code”.

Mortgage Brokers To Be Assessed On “Good Customer Outcomes”

An excellent piece from Sam Richardson at MPA.

For the first time in mortgage broking history, a ‘good customer outcome’ has been defined by the industry.

The Combined Industry Forum created the definition as part of wider governance reforms, in response to ASIC’s Review of Mortgage Broker Remuneration.

The CIF defines a good customer outcome as when “the customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”

Additionally, lenders will report back to aggregators on ‘key risk indicators’ of individual brokers. These include the percentage of the portfolio in interest only, 60+ day arrears, switching in the first 12 months of settlements, an elevated level of customer complaints or poor post-settlement survey results.

MFAA CEO Mike Felton, who took part in the CIF, told MPA that the definition “it does hold the industry to a higher standard in terms of saying appropriate versus ‘not unsuitable’, but in reality there has been so much change in responsible lending I don’t think it’s going to make that much difference to their current behaviours.

“The regulator has done a lot of research in this area, we are just articulating it…the first time it’s been articulated.”

Not legally binding…yet

According to Felton, the good customer outcome definition will not be applied retrospectively to loans and is not currently legally binding, but will be subjected to an industry code which gives teeth to the reforms.

This has come as a disappointment to consumer advocates, such as CHOICE, which wanted brokers to be legally required to act in the best interests of consumers, in common with financial planners.

The intention of the Combined Industry Forum, however, is for the definition to form the basis for a new system of governance, and become part of licensing conditions. This process of governance will not be in place until 2020.

The first step is for every individual broker to be issued with a unique identifier number, that stays with them throughout their career. MFAA boss Felton told MPA that the being able to track individual brokers would help make governance ‘data-driven’.

Insights from tracking could “provide direction to your monitoring; file monitoring, surveys, mystery shopping. That in turn drives remedial training, education and outcomes, and then reports back to continually improve.”

Felton describes the governance framework as “the centrepiece, the absolute glue, in the reform package.”

Disclosure to customers

Not only will the industry collect far more information about itself, it will also make that information public.

By the end of 2018, brokers will be required to publish to customers the numbers of lenders used in the previous financial year, in addition to the top six years and the proportion of business going to them.

Aggregators will need to provide to ASIC on the spread of lenders being used by brokers, such as brokers using less than 3 lenders or more than eight.

The Combined Industry Forum also calls for lenders to provide ASIC information on the “weighted average pricing of home loans in the previous financial year across their different distribution channels using various standard scenarios.”

CHOICE ‘Welcomes’ Broker Commission Changes But…

Consumer group CHOICE says the proposed CIF mortgage broker reforms are positive, but do not address their key concerns of ensuring brokers act in the best interests of their customers (currently they are not obliged too), and potential conflicts about poorly disclosed trail commissions.

This from Mortgage Professional Australia.

Consumer advocate CHOICE and other consumer groups have welcomed changes to broker commissions proposed by the Combined Industry Forum.

“This announcement from the mortgage brokers, aggregators and lenders is a positive first step towards ensuring that mortgage brokers act in customer interests,” said CHOICE’s director of campaigns and communications, Erin Turner.

CHOICE, which was harshly critical of brokers in their submission to ASIC earlier this year, said CIF’s proposals “shows that all parties in the home lending industry have taken ASIC’s report into mortgage broker remuneration seriously.”

It adds that the changes could increase transparency by informing consumers about the number of lenders brokers used.

CHOICE became part of the CIF after complaining to the Treasury in July that “reform must be focused on what’s best for consumers, not what works for brokers, aggregators or lenders.”

Broker heads hopeful

Both following ASIC’s review, an ongoing Productivity Commission review and in an earlier ‘shadow-shopping’ report, CHOICE have been critical of brokers in the past two years.

However, broking industry associations are hopeful that CHOICE’s involvement in and endorsement of the Combined Industry Forum’s recommendations could lead to a more cooperative relationship.

“I would hope so,” FBAA executive director Peter White told MPA. “it has turned out to be a good result, they have been involved. It’s no ‘roll over, we’ll do this because I say so’; there’s been debate and meaningful discussion about things.”

MFAA CEO Mike Felton said he looked forward to working with consumer advocates going forward: “we the MFAA and the Combined Industry Forum recognise that the consumer is a key stakeholder and that it was critical that the consumer be represented throughout this process. I think that gives credibility to the reforms that have produced.”

Still concerned about trail commissions

Consumer advocates did not entirely welcome the recommendations of the Combined Industry Forum, however.

CHOICE noted that “we are disappointed that brokers aren’t required to act in the best interests of consumers and that there are few changes to overall commission structures. In particular, there is little clarity about the consumer benefit of trail commissions.”

“Consumer groups will continue to discuss these reforms with industry and look forward to their implementation.”

CHOICE has complained about trail commissions to an ongoing review by the Productivity Commission into competition in the financial system. The review, which reports in July 2018, could lead to changes by the Government, depending on its recommendations.