The Unknown Unknowns From The Royal Commission

The first round of hearings at the Royal Commission into Financial Services Misconduct closed out after two weeks of frankly amazing evidence. Their live streaming of the hearings was well worth watching.  Of the 2,386 submissions received so far 69% related to banking alone!

The case study approach looked at issues across residential mortgages, car finance, credit cards, add-on insurance products, credit offers and account administration. We discuss the findings so far. Watch the video or read the transcript.

The litany of potential breaches of both the law, company policy and regulatory guides were pretty relentless, with evidence from various bank customers as well as representatives from ANZ, CBA, NAB and Westpac, plus others. It looks to me as if many of these breaches will possibly force the banks to pay sizeable remediation costs and penalties. Weirdly, NAB who was first up, probably came out the least damaged, despite the focus on their Introducer program. Their own whistleblower programme brought the issues of fraud inside the bank and beyond to light.

Some of the other players were clearly caught out trying to avoid scrutiny, and seeking to bend the rules systematically to maximise profitability, despite the severe impact on customers. They also tried to blame systems, or brokers, or executional issues. It was pretty damming. We should expect extra remediation costs and even fines together with a heightened risk of further individual or group actions. It is not over yet.

A number of industry practices will be changed, centred on responsible lending, including a further tightening of lending standards and so credit will be harder to get – this will continue to drive credit growth, especially for housing, lower still.

In the final session, in addition to legal breaches, there was also discussion of what conduct below community standards and expectations might mean. The case study approach brought the issues to the fore.

Specific areas included mortgage broking where we think it is likely remuneration models will change, with a focus on fees rather than commissions, and this will shake up the industry. Insiders are already saying this could reduce competition, but we do not agree. Also take note that the banks tended to blame the brokers and aggregators, but they ALL have responsible lending obligations, and they cannot outsource them.

If there is a move towards meeting customer best interest as opposed to not unsuitable, this could lead to a consolidation of brokers and financial planners, something which makes sense, in that a mortgage, or wealth building is part of the same continuum, and credit is not somehow other – the two regimes are an accident of history because the credit laws evolved separately from individual state laws. They should be merged, in the best interests of customers.

But now to those unknown unknowns. I do not think the poor behaviour resides only in the large players which were examined. Arguably, it is endemic across smaller banks and non-banks too. In fact, many smaller players are very active broker users. This means that the proportion of loans held by customers which are unsuitable is considerable. We must not let this become a big bank, or broker bashing exercise. We need structural and comprehensive reform across the board.

Next we need to remember that half of all loans are originated in the banks themselves, and the same underwriting weaknesses are sure to reside there too – the banks will try to deflect attention beyond their boundaries, but they need to look inside too (and evidence suggests they prefer to look away!). Have no doubt, liar loans are found in loans written by bankers themselves. But the case studies in this sector are harder to find, for obvious reasons.

The same drivers are also apparent in the growing non-bank sector, where regulation is weaker. We need to look there too – including the car loans, and pay day loans, plus the strong growth in interest only mortgages by some players. APRA only now has new powers of oversight, but they are still pretty weak.

At its heart we need to rebalance the cultural norms in finance from profit at all costs, to serving the customer at all costs. The fact is, do that, put the customer first, and profitability follows. We discussed this in our recent Customer Owned Banking post.

Now, recalling the terms of reference of the Royal Commission, they will need to look beyond bank practice to think about completion, access to banking services and even the broader impact on the economy.

As we have argued, credit growth has been the engine of GDP growth, – the RBA has used this growth in credit to drive household consumption to replace mining investment. As lending practices are progressively tightened this has the potential to slow growth significantly at a time when rates are rising. We expect the rate of slowing to speed up ahead. I also think the confused roles of the regulators – ACCC, APRA, ASIC, RBA and The Council of Financial Regulators, where they all sit round the table (minus the ACCC) with The Treasury – are partly to blame. As the recent Productivity Commission review called out there needs to be change here too. But that is probably beyond the Commissions ambit, for now.

The bottom line is this, the economic outfall of the Royal Commission, even based on just round one will be significant. Credit growth may well slow. Bank share valuations will be hit (they have already fallen) and as the size of the costs of remediation emerge, this could get worse. But lending practices will not get fixed anytime soon. There is a long reform journey ahead.

And in three weeks, we are back, this time looking at financial planning and wealth management, the $2 trillion plus sector.


Trail commissions may lead to “poor customer outcomes,” – CBA

A senior manager of the Commonwealth Bank (CBA) has admitted that upfront and trailing commissions for mortgage brokers can lead to poor customer outcomes, as reported in the Australian Broker.

During his 15 March testimony before the Royal Commission, executive general manager of home buying Daniel Huggins said the commission structure is linked to the size of the loan. The longer loan takes to pay off, the larger the trailing commission will be. “[T]hat can lead to a conflict – well, there is a conflict between – between the customer, you know, and – and the broker,” he added.

Huggins confirmed to Senior Counsel Assisting Rowena Orr that brokers can maximise their income by getting the largest possible loan approved to extend over the longest period of time for the customer to repay.

The bank knew about this as early as February 2017, according to a confidential letter by outgoing CBA CEO Ian Narev to Stephen Sedgwick, who was the independent reviewer for the Retail Banking Remuneration Review back then. Orr presented the confidential letter during the hearing.

“We agree with the reviewer’s observations that while brokers provide a service that many potential mortgagees value, the use of loan size linked with upfront and trailing commissions for third parties can potentially lead to poor customer outcomes,” said Narev in the letter.

“We would support elevated controls and measures on incentives relates to mortgages that are consistent with their importance and the nature of the guidance that is provided,” Narev added. These initiatives include delinking of incentives from the value of the loan across the industry, and the potential extension of regulations such as future and financial advice to mortgages in retail banking.

Another CBA submission attached to Narev’s letter said that broker loans are reliably associated with higher leverage compared to those applied through proprietary channels. “[E]ven for customers with an identical estimate of ex ante risk, loans through the broker channel have higher leverage… [and] loans written through the broker channel have a higher incidents of interest only repayments,” it added.

Huggins agreed with Orr that CBA’s submission lends some support to the case for discontinuing the practice of volume-based commissions for third parties. But he said there are a range of considerations that the bank would have to make.

“There is a first mover problem, in that the person who moved first would likely lose a lot of volume. The second problem is you create a conflict if one person, or half of the people move, and the other half don’t,” Huggins said.

According to Huggins, CBA has not stopped paying volume based commissions to brokers. He also confirmed the lender has not taken any steps towards ceasing its practice.

Fees for service would only benefit major banks: AFG

AFG, a major Mortgage Broker Aggregator says that introducing fees for service would cause a “major disruption” in the finance industry, be a “clear disincentive” for borrowers to use brokers and “further entrench the oligopoly powers of the major banks”, in a response to the Productivity Commission, as reported by The Adviser.

In its response to the Productivity Commission’s (PC) draft report into competition in the Australian financial system, the Australian Finance Group (AFG) responded to the call for more information on the effect of replacing broker commissions with a fee-for-service model.

The group pulled no punches in warning that the introduction of such a model would “provide a clear disincentive for consumers to use brokers and would inevitably cause a major disruption in the finance industry”.

“The four major banks would be the only beneficiaries of a change of this kind as they would gain an additional competitive advantage over competing lenders that do not have extensive direct distribution channels,” the broking group said.

“This would further entrench the oligopoly powers of the major banks, which, coupled with the commission’s observations concerning the regulatory advantage of D-SIBs, ha[s] a negative impact on competition in the finance sector and [will] lead to a loss of the pricing benefits that resulted from the development of the mortgage broking industry.”

AFG also predicted that should such a change occur, it would not necessarily mean that any savings would be passed on (i.e. that loans would be repriced or that consumers would save money), as banks would have to distribute their products and would have additional costs (including increased staffing) “to deal with direct applications that have not been professionally compiled and pre-assessed by a broker to meet the lender’s requirements”.

“It is AFG’s contention that the presence of the mortgage broking channel is one of the few drivers of competitive tension in the Australian lending market,” the response reads.

“A consumer dealing directly with a lender has limited negotiating power or knowledge of the interest rates and lending criteria offered by competitors. A mortgage broker with access to a panel of lenders drives competition between lenders to the benefit of all consumers, not just their own clients.”

Touching on trail, AFG said that it “strongly supports” the removal of trail that increases over time, but that it does not agree that the standard trail commission operate as a disincentive to switching.

It said: “When a broker assists a consumer to refinance, trail commissions that cease with respect to the repaid loan will be replaced with the trail commissions payable on the new loan. As a result, it is AFG’s view that, in the absence of increasing trail commission rates over time, trail commissions per se are not likely to have a negative impact on broker behaviour.”

It concluded: “It is important that any changes should not result in an economic drift away from the broker to the lender, as devaluing the service provided by brokers would have significant and long-term detrimental effects for consumers by lessening the competitive tensions that currently exist in the credit industry.

“It is essential that anticompetitive conduct is not permitted to proliferate under the guise of regulatory reform.”

Best interests duty

In regard to the PC’s suggestion that a duty of care be implemented on lender-owned aggregators to act in the consumer’s best interests, AFG said that it was “very concerned” about introducing a test that would be applied to only one section of the industry “as it is likely to result in market distortions and unintended consequences”.

For example, it suggested that lender-owned aggregators could suggest that consumers are at risk if they use a broker that is not subject to the same test (and assert that the safest course for consumers is to only use brokers that are subject to the additional “best interests duty”).

Noting that the Combined Industry Forum has been working on a reform package, AFG added that “before considering additional law reform proposals, sufficient time must be allowed for those proposals to be implemented and embedded into the processes, procedures and culture of individual broker businesses”.

“Once that has occurred, it will be an appropriate time to again review the extent to which community expectations are met and good consumer outcomes are achieved,” the group said.

Lack of data on costs “disingenuous”

Noting that the commission found it difficult to ascertain from lenders the costs and benefits of using brokers rather than branches to source home loans, AFG said that the lack of information from lenders “should be considered to be disingenuous”.

“It is difficult to accept that entities that are sophisticated enough to develop and manage banking products and meet complex legal and regulatory obligations do not have information about product costs that would be needed to price those products,” the group said.

“However, absent a willingness to publicise that information, AFG submits that the willingness of lenders to embrace broker distribution should be considered reasonably reliable evidence that brokers provide an efficient and cost-effective means of distributing lending products.”

It added: “Brokers provide a variable cost base for lenders, with payment only required when a loan is settled and while it remains undischarged and not in default. This means that the risk of non-completion by a prospective borrower is substantially borne by the broker. As a result, lenders using broker distribution (as opposed to fixed-cost branch networks) can more easily price loans in a way to ensure that they are profitable.”

AFG also outlines that it believes ASIC should be responsible for advancing competition in the financial system, that consumers would receive “an inferior standard of service” should financial advisers also offer credit advice, and that ASIC could produce a best practice guide on disclosure requirements.

‘No evidence’ that brokers limit switching: NAB

NAB, the owner of three of the larger mortgage aggregators, says Broker-originated loans are refinanced at “more than double” the rate of direct-channel loans in its new submission to the Productivity Commission; reports The Adviser.

In its second submission to the Productivity Commission (PC), released on Wednesday (21 March), the National Australia Bank (NAB) stated that it has found “no evidence” which suggests that the payment of trail commission has limited “switching” for broker-originated loans.

The big four bank responded to draft finding 13.1 of the PC’s draft report, which alleged: “The payment of trail commissions creates perverse incentives for brokers by rewarding them for keeping customers in their existing loan. Broker loyalty appears skewed towards the institution, not the customer, and thus likely discourages refinancing.”

In its submission, NAB noted that in the 2017 financial year (FY17), switching was more prevalent among borrowers with broker-originated loans.

“NAB has no evidence that incidence of switching is lower for mortgage broker-originated borrowers compared to those originated via direct channels,” the submission reads.

“In fact, refinance out rates for NAB’s mortgage broker-originated loans was more than double the rate of direct channels in FY17.”

The submission echoed the views put forward by NAB COO Anthony Cahill in his address to the PC on 5 March, stating that brokers are, in fact, rewarded for refinancing a client’s loan.

“[If] a broker were to assist a customer to move the loan to another lender, they would cease receiving a trail commission from the incumbent, but earn upfront and trail commission from the new lender.”

Further, the bank reiterated its view that trail commissions are paid as an incentive for brokers to “service customers on an ongoing basis” (which PC chair Peter Harris has questioned recently).

NAB highlighted the work the Combined Industry Forum was doing to improve commission structures and raise standards.

NAB concerned over “best interests duty”

The PC has also suggested that the Australian Securities and Investments Commission (ASIC) could impose a legal duty of care obligation on brokers and called for increased broker disclosure requirements.

In its submission, NAB said that a best interests duty “may be difficult to achieve practically” as “both mortgage products and customers themselves are not homogeneous and price is not the sole determinate of a good customer outcome”.

NAB added that it was “concerned” that applying a legal best interests duty only to brokers operating under lender-owned aggregators would create an “uneven playing field”.

The bank reiterated that bringing in a fee for service would be “detrimental to competition in the mortgage market” as it would see brokers “become unaffordable for customers”.

NAB also pointed out that proposals have already been put forward by the Combined Industry Forum (CIF) to improve broker and aggregator transparency.

The major bank also said that it does not believe the publication of median interest rates would benefit consumers, as it would “create unreasonable expectations, whereby all consumers anticipate receiving an interest rate at or below the median”.

“There are legitimate, risk-based reasons for customers to receive a price that is above a median rate; for example, high-risk loans require significantly more capital compared with low-risk loans, necessitating a different price strategy,” the major bank said.

Is this the beginning of the end of the mortgage broking industry?

ABC Radio National Breakfast did a segment on Mortgage Brokers, in the light of the Royal Commission, including DFA commentary.

A prominent finance industry expert has warned we’re witnessing the beginning of the end of the mortgage broking industry as new technology makes it easier for consumers to apply for a loan on their own.

But it’s not the only pressure facing these middlemen between lender and borrower.

The mortgage broking industry has faced intense questioning about its practices during the first round of the Banking Royal Commission, with evidence of conflicts of interest and outright fraud being brought to light.

But the sector’s hit back saying critics are seeking to disparage an entire industry made up of predominantly honest small business owners.


Commissioner suggests trail could be paid to borrowers

From The Adviser.

The chairman of the Productivity Commission has restated his concern regarding the payment of trail commission, warning that “someone is going to have to deal with this question of commission”.

Despite ASIC’s remuneration review finding that ongoing trail “usually provides an incentive to aggregators and brokers to put forward higher-quality loans where consumers are less likely to default on their obligation”, and despite several industry figures — including FBAA head Peter White, MoneyQuest managing director Michael Russell and National Australia Bank CEO Antony Cahill — giving evidence at the public hearings last month of the benefits and necessity of trail commissions, the PC’s chairman suggested that trail could instead be paid to borrowers.

Speaking at ASIC’s Annual Forum on Tuesday (20 March), Peter Harris argued that he had not been convinced that trail commission benefits customers.

He told delegates that while the commission “didn’t make a clear statement saying they’re rotten and evil”, they do believe that trail commissions are “quite odd”.

“[It] is purported to be the case that [trail commissions] are either paid by the banks in order for the broker to look after you during the period of the loan. But when we ask the banks, ‘Are there any performance standards that go with this in return for your money? Have you asked them if they’ve spoken to the customer in the last 12 months?’, the answer generally appears to be ‘no’.

“[There’s] a good chunk of money out there paying for service for which there is no performance standard, which is an interesting development. The other rationalisation is [that] it’s there to stop churn.”

However, Mr Harris stated that there was “conflicting evidence” given surrounding churn.

“In some cases, exactly the same broker representative who told us that churn wasn’t relevant [was] in a public statement, on record, saying it was exactly the reason why [brokers are] getting these payments,” the chairman said.

“Somewhere, someway, someone is going to have to deal with this question of commission.”

Remarkably, Mr Harris suggested that instead of banks paying brokers trail commission, the payment could be made direct to a borrower.

He said: “There are alternatives into the idea of a [trail] commission paid to a broker. The average $665 a year payment could be paid to the consumer not to switch loans,” Mr Harris suggested.

The commissioner noted that the final draft of the Productivity Commission’s report (due in July) is likely to address the impact that trail commission has had on competition.

“Has the revolution been captured by the establishment?”

Mr Harris also suggested that while brokers may have disrupted the mortgage market, he questioned who now held the most market power.

“The question is who’s exhibiting the market power? That is the most important issue,” Commissioner Harris said.

“There are a number of potential suspects starting from, of course, the banks themselves, but equally it is possible that mortgage brokers themselves have substantial market power in this marketplace.

“[What] are [brokers] doing today with that particular power? [I] think a number of people haven’t focused on [that] in exactly the way we would in a competition inquiry. We would say: ‘Gee, that’s interesting, these banks don’t appear to be able to push back on the brokers’.”

Commissioner Harris referred to testimony made by the major banks to the financial services royal commission and suggested that the banks’ ability to “re-determine payment arrangements in the customer’s best interests” has been diminished by the broking industry’s increased market share.

“Even the Commonwealth Bank can’t act on its own, which is an astonishing reflection of apparent market power,” Mr Harris said in reference to the bank’s appearance before the royal commission.

Mr Harris acknowledged the role that the “broker revolution” played in enhancing competition when the industry first emerged, but he questioned whether brokers still work in the best of interest of customers.

“Brokers are potentially wonderfully competitive forces. The question is, has the revolution been captured by the establishment?” the chairman said.

Mr Harris asked: “After 20 years, has this degree of change now being turned around from being a potential benefit to consumers to being potentially acting somewhat against their interest and that is clearly within scope for us — that is a competition issue.”

The Productivity Commission’s draft report was widely criticised by the broking industry, with the associations calling some of its views on broking “limited”, “amateur” and — in some cases — “nonsense”.

Brokers expect to write more non-conforming loans

From The Adviser.

Mortgage brokers believe that tighter prime lending policies and changing customer needs will drive up demand for non-conforming mortgages over the next 12 months, according to new data.

A Pepper Money-commissioned survey of 948 mortgage brokers has revealed that 70 per cent expect to write more non-conforming loans in the coming year, while 66 per cent predict a decline in the number of prime loans written.

Surveyed respondents expect the demand for non-conforming loans to rise as a result of tighter prime lending criteria (22 per cent), changing customer needs (21 per cent) and changing legislation/regulations (13 per cent).

“The survey shows clearly there is a greater awareness and understanding of non-conforming loans among brokers,” Pepper Group’s Australian CEO, Mario Rehayem, said.

“Brokers and consumers no longer see non-conforming loans only for people who’ve experienced a credit event; instead they realise they are a valid alternative for consumers who are self-employed, who generate income outside of normal work scenarios, are seeking investor loans or have a high LVR.”

The CEO believes that brokers are servicing increased demand from Australians for flexible lending alternatives.

Mr Rehayem said: “With the big banks tightening their lending criteria on an almost daily basis, they are excluding a whole segment of credit-worthy ordinary Australians from accessing finance. That’s why more brokers are discovering the benefits of a flexible lender with a consistent approach to credit provision.

“We also know more Australians are working for themselves or on a part-time basis, and brokers are looking to provide their growing self-employed customer base with suitable lending options.”

Moreover, the survey found that the number of brokers who have yet to write a non-conforming loan has also reduced, falling by 6 per cent from 18 per cent in 2016 to 12 per cent in 2018.

“We know brokers who have previously written a non-conforming loan for a customer are more comfortable in recommending them in the future, that’s why we have established ourselves as a leader in broker education and the provision of tools that allow them to confidently recommend a non-conforming loan in the future,” Mr Rehayem concluded.

Best Interest and Brokers – It Could Be Positive – ANZ

From The Adviser.

Applying best interest obligations to brokers could help preserve the integrity of the third-party channel, according to ANZ CEO Shayne Elliott.

In his opening address to the Productivity Commission (PC) on Tuesday, 6 March, Mr Elliott claimed that a “best interest duty” applied to the broking space could enhance consumer protection.

“About half of our mortgages originate from brokers. As such, while we don’t own a broker network, we believe the integrity of the channel is critical,” the CEO said.

“The Productivity Commission has made some recommendations concerning brokers. We see merit in enhancing the consumer protections in this space.

“A best interests duty could support the existing law to promote consumer interests when receiving help from a broker.”

In draft recommendation 8.1 of its report, the PC called for the Australian Securities and Investments Commission (ASIC) to impose a “clear legal duty” on lender-owned aggregators, which should also “apply to mortgage brokers working under them”.

The ANZ CEO told commissioners that despite the absence of a legal duty of care, consumers may be under the impression that such obligations already exist.

Mr Elliott added: “I imagine that a lot of people think that the broker does have a duty of care to them. I imagine that when mums and dads walk into a [brokerage], they assume that is the case.

“You may go as far as to say that they have a best interest duty as well — I don’t know — but I think there is an expectation.

“[I] think FOFA [Future of Financial Advice reforms] and others have probably raised that expectation and say well if that’s the rule for a financial planner, we assume it is for a broker, but I think it’s important to go and ask consumers and their representatives.”

ANZ on fees for service

Further, PC commissioner Peter Harris inquired about the feasibility of a fixed fee model as opposed to a volume-based commission paid to brokers.

“I have the impression that perhaps a fee is a better proposition. The question might be, should it be paid by the consumer, or should it still be paid by the bank?” Mr Harris said.

In response, the ANZ chief said that there is “absolute merit” in exploring such a model, and he pointed to the use of a fixed fee structure in Europe.

“The reality is, today, in an open, highly competitive market, [we have been] taken down a commission-based structure,” Mr Elliott said.

“There’s an understandable logic to that given that there’s an alignment between the commission and the volume obviously driving revenue to the bank.

“I think there’s merit in looking at a fee-based structure. I can’t imagine [that] it would evolve naturally — that would require some intervention. Either as an industry or through regulation would be my guess.”

ANZ on financial planners entering the credit space

The major bank chief also commented on calls from the PC to introduce financial planners into the credit space.

Mr Elliott highlighted the difference between the two services and noted that there are no restrictions on financial planners obtaining a broking license.

“To my knowledge, there’s nothing stopping people from doing that today, so if I have a financial planning license, I can go and get a broking license — there’s nothing prohibiting that, but for some reason, that has not evolved,” the CEO said.

“Our view from experience, and just looking at the products, they are different and our customers think about them in a very different way.

“There’s an old adage: wealth products are sold and mortgages are bought. People think about them very differently; they think about who they go to for that advice.”

Would Switching To Fee For Service For Mortgage Brokers Be “Anti-competitive”?

Some participants in the mortgage industry are mounting a push to argue a switch from mortgage broker commission payments, which normally  includes an upfront fee and a trailing payment for the life of the loan paid by the lender to the broker, to a fixed fee for advice would be “anti-competitive.

The former Mortgage Choice chief Michael Russell in evidence to the currently running Productivity Commission (PC) Inquiry into Financial Services said:

Is the outcome of directing more consumers that can’t afford the fees for service back to first party [in] any way in the consumer’s best interest? Is that outcome, in any way, a positive thing to be promoting competition in the lender market?

This is in response to the PC suggesting there was no rationale for the trailing commission payments and that mortgage brokers should move towards a fee for service payment, instead of a commission, paralleling changes in the financial planning sector. The moves in the financial planning sector was a response to perceived conflicts of interest where planners perhaps shaped their advice driven by the remuneration they might receive.

Non-transparent fees and trailing commissions, and clear conflicts of interest created by ownership are inherent. Lender-owned aggregators and brokers working under them should have a clear best interest duty to their clients.

The commission’s draft report released in early February says that based on ASIC’s findings, lenders pay brokers an upfront commission of $2,289 (0.62%) and a trail commission of $665 (0.18%) a year on an average new home loan of $369,000. $2.4bn is now paid annually for mortgage broker services.

The discussion of trailing commissions centered on whether there was downstream value being added to mortgage broker clients, for example, annual financial reviews, or being the first port of call when the borrower has a mortgage related question. The interesting question is how many broker transactions truly include these services, or is the loan a set and forget, whilst the commissions keep flowing?  There is very little data on this.

In the UK, mortgage brokers work within a range of payment models. Many mortgage brokers are paid a commission by lenders of around 0.38% of the total transaction and some mortgage brokers also charge a fee to their customers.

On average, you pay £500 for a broker to arrange your mortgage. But different firms charge in different ways:

  • Fixed fee. Your adviser will agree to arrange your mortgage for a fixed amount of money. This should be agreed in writing so there isn’t any room for dispute.
  • Hourly rate. Some advisers will charge per hour. Make sure the adviser gives you an estimate of how long the work will take.
  • Commission. If a mortgage adviser is ‘fee free’, they may be receiving payment in the form of commission from the lender. Make sure you ask about it right at the start so you can’t be misled.
  • Percentage. Some advisers will charge you a percentage of your mortgage. For example, if you agree a 1% charge for a £300,000 mortgage, the fee will be £3,000. Some advisers will cap fees to a certain percentage.
  • A combination. Some advisers will charge fees but still receive commission. Others will charge fees, but agree to cap them at a percentage of the mortgage.

So, a fee, is not always simple to calculate and compare.

A fee for service may be cleaner, but it might put access to broker services out of the reach of some potential borrowers, as has been the case in the UK.  Would better disclosure of the commissions and the relationships with lenders would offer an alternative path? But then, would that remove the conflicts?

The final PC report will be out later in the year, and it appears the question of broker commissions, which are often not disclosed in a way that is meaningful to clients, will certainly be an area of interest.




ASIC Highlights Burgeoning Referrer Market

From The Adviser.

The financial services regulator has told the Productivity Commission that there is now “an industry of referrers” who are often being paid the same amount as mortgage brokers despite doing less work.

At the final day of public hearings for the Productivity Commission’s (PC) inquiry into competition in the Australian Financial System, the financial services regulator outlined its thoughts on a range of topics, including mortgage brokers’ duty of care obligations, broker remuneration, comparison rates and financial advisers giving advice.

Speaking for the Australian Securities and Investments Commission (ASIC), Greg Kirk, the senior executive leader for strategy, and Michael Saadat, the senior executive leader for deposit takers credit & insurers, noted that there was a growing referrer market that are being paid a relatively high commission despite not being bound by the same regulation and compliance as brokers.

Mr Kirk said: “In our work on [broker] commissions, there were a separate category of people who are paid commission who don’t arrange the loan but just refer the borrower to the lender. It seems to be that professionals — lawyers, accountants, financial advisers — are reasonably prominent among people who are acting as referrers and that this strange one in that commissions they were paid for just a referral was almost as large as that [for a] mortgage broker doing all the extra [work].”

Indeed, Mr Saadat emphasised that although there is an exemption within the law for referrers, he noted that there is now “a fairly large industry of referrers comprising professionals, lawyers, accountants and advisers who do directly refer consumers to particular lender[s]” and that the commissions paid to these referrers “can be quite significant”.

“In some cases, [they are] as close to the commissions that are paid to mortgage brokers, who are doing more work than a referrer is supposed to be doing,” Mr Saadat said.

ASIC’s senior executive leader for deposit takers, credit & insurers continued: “What they can do under the law is quite limited. I guess there is a risk that some might be going beyond what they are allowed to do under the exemption and that risk is potentially exacerbated by the incentives that are provided by banks. And we have seen cases where misconduct has occurred by so-called referrers and ASIC has taken action against those.

“But, yet, it is a feature of the law, and as a result, there is now an industry of referrers that includes financial advisers and therefore they are paid for that referral.”

The Productivity Commission also asked ASIC about whether financial planners should be given the ability to move into the credit space, to which the senior executive leader for strategy outlined that there seems to be little appetite from planners to offer it.

Mr Kirk said: “Financial advisers can and do provide advice on credit now, and in fact, our regulatory guidance encourages them to in some circumstances… We’re going through at the moment some of our databases to try and get you some data on the level of crossover, but as a broad indicator, it would look to be about 4 per cent licences have a dual licence.”

ASIC on remuneration and changing standards

Touching on the potential of increasing standards for mortgage brokers and potentially changing broker remuneration, the regulator suggested that only small tweaks, rather than drastic changes, would be needed.

Mr Kirk said that when mortgage brokers were first regulated, the standard set was the same as that of the product issuer (i.e. a bank), but he said that “it does seem now that a mortgage broker is [working] to offer customers something more”, such as help with navigating the marketplace. As such, he said that “there is scope to increase the standards expected on mortgage broker”.

However, the strategist argued that “it may be better to start with the obligation that is on [brokers] now and to work in some more specific requirements”, rather than bring in a new “best interests” duty.

Mr Kirk explained: “Typically, there are two elements now of responsible lending; the loan has to be repayable by the consumer given their financial circumstances without undue hardship, but it also needs to meet their needs and objectives.

“And I think often, at the moment, the needs and objectives are only explored in very broad terms [such as] the main need is to buy a house… rather than more detailed needs and objectives about looking for the most competitive loan [a borrower] can get, the best priced one across the market, etc.

“There is something more explicit about what they should be canvassing and addressing in meeting consumer needs and objectives [and there] may be a more direct way to get to this sort of solution.”

Mr Saadat went on to highlight that ASIC’s report for its review into broker remuneration last year suggested “improvements” to the standard commission model rather than fundamentally changing commissions structures, and noted that the “industry has come together and proposed a number of improvements to that standard model” which he believes are “positive suggestions”.

He told the PC: “I suppose one thing to consider is whether you wait for the impact of those to flow through to the market and then assess whether further change is required or whether there is enough evidence now to say that more fundamental change is required to those commission arrangements.

“And for our own purpose, I don’t think we have landed on that position.”