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.

Brokers to have new code and unique identifier numbers

From The Adviser.

By the end of 2020, brokers will be given a “unique identifier number” and be subjected to a new code of conduct, following changes that are to be instituted by the Combined Industry Forum.

The newly released reform package from the Combined Industry Forum has outlined changes to remuneration structures (including changes to upfront and trail commissions) and recommended that the sector would be subject to new code and identifier numbers “to allow for more complete reference checking and identification of poor performers”.

New industry code

While the industry code is yet to be developed, the CIF outlined that it would begin working on a new code by “mid 2018”.

The report read: “The proposed reforms will be industry-led, and individual industry participants have committed to taking immediate steps (having regard to competition law requirements) to implement the reform package. However, to ensure the ongoing viability of the reforms and equal consumer protections, the reforms will need to be captured in an industry code that enables enforcement, applies across the industry and includes new participants over time.

“The CIF is considering a number of approaches, including working with ASIC on establishing an ASIC-approved code for all participants in the mortgage industry, and/or repurposing current industry codes to include these reforms, and to house the appropriate monitoring and compliance functions.”

The code will reportedly take into account the outcomes of the ASIC Enforcement Review’s assessment of ASIC’s code approval powers, and any new obligation for industry participants to subscribe to an approved industry code.

The report continued: “A ‘mortgage broking industry code’ would apply to mortgage brokers, lenders, aggregators and, where appropriate, referral businesses and would be subject[ed] to all applicable regulatory and competition law approvals.”

Speaking to The Adviser about the code, Combined Industry Forum chairman Anthony Waldron said: “It’s really important that we work with ASIC and the government on this to get it right. So that’s whether we repurpose one of the existing codes (for example, there are codes with the industry bodies) or whether it is another ASIC-led code.

“We are still working through exactly how that works, but we think codifying these changes is important to ensure that the industry absolutely implements them. This is a coded, directional piece to say, [and] we want to make sure that the industry takes it seriously and that the government and all players can be ensuring that they are comfortable the industry is moving forward. The code will provide that ongoing monitoring to ensure that it will happen in the future.”

The CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, said: “This ‘mortgage broking industry code’ would apply to all players across the value chain. It may be a new standalone code or an addition to existing codes, and adherence to it could even become a future licence condition of relevant ACL holders.

“We are completely confident in brokers’ ability to create consistently good consumer outcomes, but we’re equally confident in the industry’s ability to do more to show transparency and ensure the trust we’ve earned from consumers is maintained in the long term. I am looking forward to continuing our work with the CIF and ASIC and implementing these reforms.”

Likewise, Peter White, the executive director of the Finance Brokers Association of Australia (FBAA), said: “Both associations already have a code of conduct, so this is a serious work in progress that is more of a headline statement with a desire as much as anything.

“It could be that we take the best of breed of everything and turn it into one. That is a decision that would have to be made by the MFAA and FBAA boards to see if we are prepared to replace the code or have it as an additional code on top of the ones we already have.”

He added: “Bankers already have their code of conduct, and I can’t see anyone replacing that — so they would have that and this newly proposed code as well. So, it could be that we have two as well, but these discussions are yet to be had on what the code would look like.”

Unique identifier numbers

Another aspect of the CIF’s “landmark reform package” that aims to “improve consumer outcomes and confidence in mortgage broking” is the introduction of a new unique identifier number for brokers.

First suggested by the MFAA to help provide ASIC with “the complete and accurate broker picture it desires”, the association suggested the industry bring in a “single broker identifier number” that would be mandatory for use on each home loan sold.

“Such a unique identifier of the broker that has intermediated any loan must be provided to the lender with the application and stored by the lender throughout the life of the loan and for a period of seven years after the last interaction with a customer in line with other NCCP Act requirements,” the MFAA stated in its response to Treasury.

The MFAA noted earlier this year that while there were existing identifiers in use, such as credit licence numbers or credit representative numbers, it is not “clear whether these numbers cover all brokers and staff”.

As such, the association proposed that it could therefore require a “different number” to be used by those who operate directly under their employer’s ACL number.

“This solution may initially be a lender-specific unique identifier, but in time, ideally each broker should receive a single identifier across all lenders,” the submission read.

This suggestion has been taken up by the CIF, whose report stated: “In response to Sedgwick’s recommendation that ‘the industry needs to improve the governance and oversight of brokers, lenders and aggregators, the CIF has proposed that it bring in new unique identifier numbers for brokers.

“The industry intends to work with the government to implement a unique identifier for each broker and introducer/referrer to lender, noting that there is investigation required around how this can be implemented.

The unique identifier should be held on a register of brokers maintained as a reference checking protocol for credit professionals moving between aggregators or moving from working with a lender to an aggregator.

The CIF elaborated: “Ideally, this identifier would be maintained throughout a person’s career across financial services industries, such as financial planning, mortgage broking, referring/introducing and as a lender-employed banker, and be managed centrally by ASIC. Once fully implemented, this identifier would be used by aggregators, lenders, associations and ASIC, and be held against all loans lodged at the lender level to assist with data analytics.”

Mr Waldron told The Adviser: “There is a lot of work still do with this one and we will need to work with ASIC closely on that. This [number] is designed to be portable, so you take it with you no matter where you are working. We think that will improve a whole range of things, but ensuring that the governance that we talk about can be implemented — and that if people change aggregator, for example — that reporting can continue.

“Down the track, we think that efficiencies can be created out of it for the industry as well. But we still have a bit of fair work to do to implement this one and we will need ASIC to implement this.”

The FBAA’s Peter White said that he could “see the value in a unique number that carries across everything and that helps manage the industry”, particularly as bankers who write home loans aren’t captured by ASIC’s current register of those operating with ACLs and ACRs.

He said: “So, I see this new number — if it’s set out in a desirable way — not changing anything else but enhancing what is already in place.”

The CIF outlined that it expects the unique identifier numbers to be implemented by the “end of 2020”.

CIT Proposes Broker Remuneration Changes, Keeps Commissions

The representatives of Australia’s mortgage broking industry have prepared a reform package that they say will improve consumer outcomes and confidence in mortgage broking. But the package still keeps the essence of commissions, while removing volume incentives and capping soft benefits. Disclosure of ownership and commissions will be improved.  [This all signifies the current arrangements are not adequate – and change is needed – an important signal in my mind!]

The details from Australian Broker.

The reform package is the result of unprecedented engagement between industry bodies, lenders, mortgage brokers and their representatives, aggregators, introducers, and consumer groups, who have worked together since May 2017 as the Combined Industry Forum, and follows consultation with regulators and Federal Government.

The paper is in response to the proposals outlined in ASIC’s Review of Mortgage Broker Remuneration, and takes into account the third party recommendations of the ABA’s Retail Banking Remuneration Review.

The industry has agreed on six principles that will be implemented to ensure better consumer outcomes and improved standards of conduct and culture, while preserving competition in mortgage broking:

  • The standard commission model will avoid financial incentives that encourage consumers to borrow more than they need or will use, for example by basing commissions on facility draw down net of offset;
  • Volume-based and campaign-based commissions paid by lenders and aggregators are recognised as raising potential conflicts of interest and poor customer outcomes and are expected to cease;
  • Non-monetary benefits will only be given based on a balanced scorecard and good customer outcomes, and benefits given by lenders will be capped;
  • Ownership models and commercial relationships will be made clear on all marketing materials, including websites, where ownership is greater than 20 per cent, so consumers have the right information to make informed choices;
  • ASIC and consumers will be given clearer information on where loans are written, commissions paid and interest rates, to increase transparency and accountability in the industry;
  • The industry will introduce an improved Governance Framework that monitors for, and identifies risks, and requires the industry to take action and continuously improve where issues are identified.

In drafting these reforms, the industry has also for the first time set a standard definition for ‘good customer outcomes’, which looks at the size and structure of the loan, affordability, responsible lending requirements and individual customer needs.

Combined Industry Forum chairman Anthony Waldron said the release of the report this week was a significant milestone and laid clear foundations for industry-led transformation.

“We are genuine in our commitment to not only meet the proposals put forward in ASIC’s review of mortgage broker remuneration, but to raise the bar on the expectations of stakeholders from all corners of the industry,” Waldron said.

“We hope to lead by example by taking a proactive position in those areas where our industry has the opportunity to deliver even better customer outcomes.”

Combined Industry Forum deputy chairman Mark Haron said: “For a diverse range of key stakeholders to come together to deliver a meaningful package of industry-led reform is unprecedented in the financial services sector. The mortgage broking industry introduced true competition to Australia’s lending landscape and this, in itself, has delivered vastly better outcomes for consumers. With that said, there will always exist areas for continued improvement in any industry and the measures set out today mark an important step in setting a new and superior standard in mortgage broking.”

Australian Banker’s Association deputy CEO Diane Tate said: “We have put customers at the centre of this important package of reforms. The industry will be holding itself to a new standard, set higher than the law requires, when assessing good customer outcomes. The banking industry is committed to implementing this reform package, and to monitoring the impact of the reforms to ensure they are delivering benefits for customers.”

MFAA CEO Mike Felton said: “It has been tremendous to be a part of an industry that has united in its commitment to ensuring that broker remuneration is targeted at promoting strong consumer outcomes and the sustainability of our industry. It is a credit to all industry participants and representatives that they have embraced the task of self-regulation and delivered this suite of genuine reforms in such a timely and comprehensive manner.”

FBAA executive director Peter White said: “The undertakings and endeavours of the Combined Industry Forum has been an extensive exercise in co-operation and mutual respect between those who are not always necessarily aligned on matters. It has been a rewarding time to see how we as an industry and competitors can work together for the good of an industry we hold dearly, and to ensure good consumer outcomes are continued to be maintained by our actions. It is an honour to be a part of this group and the
journey will continue into the future as we continue to work with government and our regulators on these outcomes.”

Australian Finance Industry Association (AFIA) CEO Helen Gordon said: “Our members are focused on financing Australia’s future including for home ownership and investment. Mortgage brokers play a pivotal role in facilitating consumer choice and access to that finance. AFIA has welcomed the opportunity to work through the Combined Industry Forum with key industry players to propose action to address consumer risk areas raised by ASIC, while enabling home buyers to continue to have access to a competitive mortgage

Customer Owned Banking Association (COBA) CEO Michael Lawrence said: “The Combined Industry Forum has focused on improving outcomes for consumers and this package of measures is aimed at delivering on that objective. The broker channel is a big segment of the home loan market, with brokers representing more than 50% of home loans written.”

The Combined Industry Forum will report on its ongoing progress to ASIC, Treasury and the Government on a regular basis.

No additional risk from brokers, says S&P

From Australian Broker.

Leading analysts at S&P Global Ratings have commented on the major banks’ use of brokers, saying that trends in third party channels are not indicative of any additional risks for the industry.

These views come from the agency’s analysis of major bank lending practices including governance and controls around brokers, said Sharad Jain, S&P director of financial institutions ratings, at an Asia-Pacific Banking Insights session entitled What’s The Latest Credit Outlook For Australian Banks? held yesterday (29 November).

Despite these views, Jain admitted there may be constraints around making informed commentary in this area.

“We do not see any significant difference in the outcomes [between broker and proprietary] but that data itself is constrained because [it] does not come through any period of significant stress.”

While on the face of it, there may seem to be additional risks through brokers, current data does not back this up, he said.

Nico de Lange, another S&P director of financial institutions ratings speaking at the event, predicted that the broker channel would continue to be a major source of new business for the major banks.

“It will remain a channel that they [will] be focusing on but what might happen is that there might be different strategies within the major banks on the importance that the broker channels might play.”

While some of the major banks had been increasing the use of brokers, others such as the Commonwealth Bank of Australia (CBA) had slightly decreased their use of third party, he said.

Broker Commission Changes In The Wind

From The Adviser.

ANZ and AMP Bank have announced new changes to their commission structure, with ANZ’s changes effective starting 1 December while AMP’s update effective starting 5 January 2018.

ANZ stated that it will replace the Base Rate with a Consumer Customer Rate, which will be notified to brokers on a monthly basis. Under asset finance loans, the Consumer Customer Rate will be the maximum annual rate charged to customers.

Brokers will be entitled to discount the Consumer Customer Rate at their discretion by up to 200 basis points; however, the asset finance commission (AFC) will be cut in proportion to the discount offered to customers, and no commission will be paid to brokers if the discount exceeds 200 basis points.

ANZ has also decided to split the customer Other Goods into two categories: Other Goods Category 1 or OG1 (e.g., caravans, trailers and marine) and Other Goods Category 2 or OG2 (e.g., motorcycles, jet skis).

All consumer transactions must also be submitted on the consumer pricing Source of Business (SOB).

Meanwhile, AMP Bank will be changing the way it pays commissions for loans that are internally refinanced.

Changes will be processed as new loans for loans that are restructured or refinanced by existing customers, which means that broker commissions will be based on the net difference of the new and outgoing loan, rather than only being based on the new loan limit.

Further, AMP Bank’s changes mean that no commissions will be paid to brokers if the new internally refinanced loan limit is less than the original loan being financed. Standard clawback rules will remain unchanged and continue to apply to the original loan.

NAB Will Remediate 2,300 Home Loans

NAB has said it has commenced a remediation program for some of its customers, after a review identified their home loan may not have been established in accordance with NAB’s policies.

It follows the completion of an extensive review by NAB which identified around 2,300 home loans since 2013 that may have been submitted without accurate customer information and/or documentation, or correct information in relation to NAB’s Introducer Program.

NAB first became aware of the matter in October 2015, and advised ASIC in December 2015 after an initial high-level review. Since then, NAB has provided regular updates to ASIC on the progress of its investigation.

“What occurred was unacceptable. We have investigated this matter thoroughly, and, as we have always said, whenever we find issues we will investigate them, fix them, and hold people to account – and we did,” NAB Chief Customer Officer, Consumer Banking and Wealth, Andrew Hagger, said.

As a result of NAB’s review, 20 bankers in New South Wales and Victoria had their employments terminated, or are no longer employed by NAB, and an additional 32 bankers had consequences applied including the reduction of remuneration.

NAB has commenced writing to the around 2,300 customers – many of whom live overseas – asking them to participate in a detailed review of their loan, which may include verification of documents submitted at the time of their home loan application. Affected customers may be offered compensation as appropriate.

NAB has engaged with ASIC to ensure the remediation program provides fair outcomes for customers. The remediation program has been designed with reference to the methodology applied by the Financial Ombudsman Service, and with NAB’s standard approach to compensating customers. NAB will engage an independent expert to undertake regular audits of the remediation program, and will update ASIC every two months on its progress.

“I want to assure all of our customers that we have improved our systems, processes and programs as a result of what occurred here,” Mr Hagger said.

This includes changes to NAB’s Introducer Program, including enhanced governance and eligibility criteria.

Customers who receive letters to participate in the remediation program are encouraged to contact NAB on the phone number provided to them. Any NAB customer who is not part of the remediation program, but who has a query about it or their home loan, can contact NAB


Broker Boom Outpaces Loan Growth – MFAA

According to the MFAA, the boom in brokers may be unsustainable, given lower mortgage growth.  The snapshot, up to March 2017, shows that the number of brokers is estimated to be 16,009, representing 1 broker for every 1,500 in the population.  Overall brokers rose 3.3% but net lending only 0.1%. As a result the average broker saw a fall in their gross annual income. On these numbers, brokers cost the industry more than $2 billion each year!

Around 53% of new loans come via brokers, they claim.

They call out a mismatch between the number of brokers and new loans settled, and other than in VIC, volumes are down relative to brokers.

Here is their release:

The latest Industry Intelligence Service (IIS) Report has revealed that finance brokers continue to facilitate more than one in two (53.6%) of all mortgages written in Australia.

“This is a strong performance in the context of investor and interest only prudential measures imposed by regulators during the period, however, there are some warning signs that we need to be taking note of,” said Mortgage & Finance Association of Australia (MFAA) CEO Mike Felton.

The IIS Report has revealed the number of finance brokers in Australia has grown by 3.3% to just over 16,000 (in the six-month period October 2016 to March 2017), with more than 500 new brokers joining the industry in the reporting period.

This exceeded the growth in the value of new home loan settlements by brokers nationally (up 0.1% at $94.61 billion) and the number of broker-originated new loan applications which fell 4.5% to 303,300.

“Whilst the improved broker coverage is positive for consumers, these statistics should be seen as grounds for caution and need to be closely monitored. It is not a sustainable trend to have broker numbers continually rising faster than the value of new business written and could be part of the reason why the report shows the average income for brokers is down 6% nationally. When the pie stays the same size and there’s more mouths to feed, the slices inevitably get smaller. The report reveals that, on average, the sum of a broker’s up-front and trail remuneration is $133,500 per annum, before costs, which is down from $142,500 in the previous report,” he said.

“The data shows that on a state level, only Victoria appears to have a clear alignment, or a reasonable equilibrium between the growth in broker numbers and growth in new lending,” he said.

The report also reveals that Australia’s finance brokers are gradually utilising the services of a more diverse range of lenders and diversifying the types of loans they are writing as well.

“This report is showing a shift in the broker use of loan products from majors and regionals aligned to majors to specialist lenders, international lenders and broker white label products,” Mr Felton said.

“Greater diversity is good news in that it strengthens the broker proposition and competition within the mortgage market,” Mr Felton said.

The MFAA’s Industry Intelligence Service (IIS) Report provides reliable, accurate and timely market intelligence for the mortgage broking sector. It is designed, produced and delivered by Comparator, a CoreLogic business and a recognised provider of performance benchmarking, market diagnostics and ad-hoc investigative services to the retail financial services sector in Australia and New Zealand.

Brokers burned by customer-driven channel conflict

From The Adviser.

Home loan conversion rates are plummeting as borrowers attempt to secure a mortgage by making multiple applications across different channels, new research has found.

Data from Digital Finance Analytics (DFA) shows that in recent months, the number of mortgage applications which are made, but which do not lead to a funded loan, is on the rise.

Back in 2015, the ratio was around 80 per cent. Now it has dropped to around 50 per cent.

DFA principal Martin North said that the data, which is based on 52,000 Australian households, shows that more multiple applications are being made to a portfolio of lenders in an attempt to get a single approved loan.

“Essentially, they are backing both horses,” Mr North explained. “They are talking to brokers and potentially putting applications in via brokers but also putting applications in themselves.

“It is creating a lot of noise in the system. That means there is a much lower probability of an application a broker is handling translating into a funded loan.”

The analyst believes that a number of factors are contributing to the rise in multiple mortgage applications being made by the same client across different channels. The ease of applying for a mortgage online, driven by comparison websites and digital platforms that enable a DIY approach, is believed to be a major factor.

In addition, Mr North points out that consumers understand that credit has become tighter following the introduction of macro-prudential measures.

“They understand that the hurdles are higher now,” the principal said. “They don’t necessarily trust one channel over another, but they will try this portfolio approach and see what turns up. The fact that the processes are far simpler now than they used to be is making it easier.”

The DFA data shows that younger borrowers under the age of 40 are making multiple applications more than any other age groups. Mr North said that this is not surprising, given their digital literacy.

He believes that the findings shift the conversation about mortgage channels and pose significant challenges for banks and brokers.

“I bet nobody asks whether the borrower currently has a mortgage application in the system,” Mr North said. “Perhaps, that’s a questions banks and brokers need to start asking.”

ABA dumps Sedgwick’s commissions guidelines

From Mortgage Professional Australia.

Banks will be free to take their own approaches to broker remuneration after the Australian Bankers Association abandoned a key part of the Sedgwick Review.

Originally the ABA set out for banks to collectively develop “guiding principles” for the way banks remuneration brokers and their own staff. However, the preparation, consultation and finalisation of guiding principles will no longer take place, according to an update on the ABA’s work by independent but ABA-commissioned reviewer Ian McPhee.

Each bank will instead develop its own approach to commission, a move receiving scathing criticism from McPhee: “In taking this decision to vary its implementation plan, the industry has forgone the opportunity to establish guiding principles and demonstrate strong leadership in this area which has traditionally had a high profile, by building on the momentum for change stimulated by the Sedgwick Review and ASIC’s review of mortgage broker remuneration.”

Banks have also dropped their original plan to work directly with legislators to change broker remuneration, McPhee reported. Instead, they will work with brokers within the Combined Industry Forum and “proceed without the need for regulatory or legislative intervention to achieve the outcome of improved payments and governance practices.”

Clearing the path for the Combined Industry Forum

McPhee’s finding that the ABA has effectively sidelined its own report represents a huge victory for brokers.

Sedgwick recommended ‘guiding principles’ which included decoupling remuneration from loan size and bringing broker governance in line with that of retail bank staff.

Furthermore, Sedgwick recommended banks implement these changes by 2020, putting banks on a completely different timeline to that adopted by brokers and the Government following ASIC’s separate remuneration review.

Now banks can develop their own principles for remuneration, they will be free to take pragmatic approaches to commissions which better meet brokers’ expectations. It also opens up the intriguing possibility that banks who are more reliant on brokers – such as the non-majors – could adopt more generous remuneration arrangements than those with larger direct channels.

The signs of division 

MPA reported earlier this week that the Sedgwick’s proposals could soon be buried by the banks.

The first signs of division emerged during the Treasury’s consultation process following ASIC’s Review, where different banks took very different views to those expressed by Sedgwick.

Westpac explicitly criticised the use of flat fees, noting: “a flat fee commission structure could prompt an increase in split banking as brokers seek to maximise income by submitting smaller deals.”

The final straw may have been the announcement that ANZ CEO Shayne Elliott would be the ABA’s next chairman. Elliott told the House of Representatives last week the commission changes were ‘complicated’ and needed more work: deputy CEO Graham Hodges added that “the devil’s in the detail because clearly, it’s going to affect thousands of brokers.”

Brokers ‘not recording the outcomes’ of IO discussions: ASIC

From The Adviser.

Brokers may be having the appropriate conversation with borrowers on interest-only home loans, the financial services regulator has said, but there has been some “pretty poor record keeping”.

The financial services regulator announced last week that it would “shortly” begin reviewing the loan files of brokers with a “high proportion of interest-only loans” as part of its work “to ensure that consumers are not paying for more expensive products that are unsuitable”.

The review was triggered by the fact that interest-only (IO) loans are now often more expensive than principal & interest loans, and it is therefore becoming “ever important now for lenders and brokers to explain and justify why they are putting people into more expensive loans”.

Speaking to The Adviser, Michael Saadat, ASIC’s senior executive leader for deposit takers, insurers & credit services, elaborated that while the regulator believes that brokers are having the appropriate discussions with consumers about the reasons for taking out IO loans, the record keeping on loan files has not been of a high standard.

He revealed: “In the past, I’d say we have seen pretty poor record keeping on that front, where there has been very little on the loan file which tells you why the consumer got that product. In general, when we have looked at loan files in the past, we have seen [responses to the question]: ‘What were the consumers’ requirements and objectives?’ In many cases, we see things like: ‘To buy a house’. That is pretty implicit, but it really doesn’t tell you too many things about what type of product, what type of loan, what type of rate, etc.

“So, our view is that although these discussions are happening… brokers are having these discussions, but they’re not recording the outcomes of those discussions. And it’s hard to prove that you’re meeting your obligations if you don’t have something on a file that shows why you have recommended a particular loan.”

What ASIC wants to see on IO loan files

Mr Saadat added that the next stage of the review into interest-only loans will be “getting these individual files and looking to see how consumers’ requirements and objectives have been documented on those files”.

He said: “If [borrowers] have been provided with an interest-only loan and they are an owner-occupier, we will be looking for a summary or an explanation on the loan file that describes why the consumer was provided with an interest-only loan. So, that’s really the key thing.”

Adding that ASIC “won’t be that prescriptive in terms of our expectations”, Mr Saadat revealed that what the regulator wants to see is “information on the file which is sufficient to explain why the consumer’s decision (or suggestion from the lender or broker) to go into an interest-only for an owner-occupier loan was the right one”.

The lending industry has already begun responding to some of these concerns, with Commonwealth Bank launching a new IO simulator to help brokers show customers the differences between these type of repayments as well as principal & interest repayments.

Mr Saadat told The Adviser that these types of tools, which delve deeper into why consumers need an IO product, help “make the consumer aware of some of the risks involved with going down a particular path”; for example, “the fact that at the end of that period, you do need to make higher principal and interest payments and, over the life of the loan, you may end up paying more interest as a result”.

Mr Saadat concluded: “Investors may have other reasons for getting an interest-only loan — they may be tax reasons, for example, whereas those reasons don’t necessarily apply to owner-occupiers. And that doesn’t mean that owner-occupiers should never have been given an interest-only loan. Of course, there will be cases where that still is appropriate. We just want to make sure that it is appropriate and that you’re documenting the reasons for that.”

The regulator’s crackdown on IO loans has begun to bite, according to some industry data. New data from Mortgage Choice has revealed that there was a 60 per cent decline in interest-only mortgages over a period of just six months.

According to Mortgage Choice’s latest home loan approval data, the proportion of interest-only loans written by the brokerage dropped from 35.95 per cent in April 2017 to 14.64 per cent in September 2017.

CEO of Mortgage Choice John Flavell said that the “significant decline” was a result of lenders hiking rates for these loans.