The Banking Royal Commission has already cast a spotlight on so called Introducer Programmes, which allows professionals like lawyers, accountants and even real estate agents to be rewarded for flagging a potential mortgage lead to a bank. They are paid if the lead is converted by the bank.
As they are not providing financial advice, there is no formal regulation, only “professional” standards that they should disclose any financial reward for such activities. But how many do? Would you know?
This is, to put it mildly, a black hole. NAB showed that between 2013 and 2016 its introducer program brought in mortgages worth $24 billion, while paying out around $100 million in commissions to its introducers, or about 0.4%. Given that mortgage brokers get around 0.68% plus a trail, for doing significant work to steer an application through, introducers get money for old rope.
ASIC already highlighted this practice during evidence to the Productivity Commission review into Financial Services. An ASIC representative 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.
Disclosure needs to be tightened, and I question whether there is a role for such introduces at all.
Separately at the RC, we learnt that the banks are talking about adopting an updated HEM (the Melbourne Institute based benchmark). “The Household Expenditure Measure (HEM) is a measure that reflects a modest level of weekly household expenditure for various types of families. The Melbourne Institute produces the quarterly HEM report which is distributed through RFi Roundtables”.
The HEM is used to benchmark household expenditure as part of a loan application, and it looks like revisions will hit later in the year. But the RC probed whether there was a first mover disadvantage (as the metrics would lead to less ability to lend) and whether this is why there was an industry led coordinated approach.
Does the fact that there is an industry panel trying to deal with this motivate it, in part, by the avoidance of first mover penalty?—No. Well, that certainly wasn’t the motivation to set up the working group. It is something that has been discussed though, is with a number of changes coming this year in terms of uplifting serviceability standards, such as comprehensive credit, changes to HEM and new 25 measures such as debt to income ratios, it has been something discussed around the first mover disadvantage.
I wonder if the ACCC would have a view?
The RC also probed whether the HEM adequately reflected true levels of expenditure, as it was based on a “modest” lifestyle.
The story continues….
