Category: Banking Culture

ASIC reports on changes to small business loan contracts by big four banks

ASIC has today released a report setting out the details of the changes made by the big four banks to remove unfair terms from their small business loan contracts of up to $1 million.

The report, Unfair contract terms and small business loans (REP 565),  provides more detailed guidance to bank and non-bank lenders about compliance with the unfair contract terms laws as they relate to small business.

The report follows the announcement in August 2017 that the big four banks had committed to improving terms of their small business loans following work with ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). (See 17-287MR).

ASIC Deputy Chair Peter Kell said, ‘The UCT report provides further guidance to help banks and other lenders ensure that their small business loans are fair, and do not breach the rules prohibiting unfair contract terms.’

The report:

  • Identifies the types of terms in loan contracts that raise concerns under the law
  • Provides details about the specific changes that have been made by the banks to ensure compliance with the law
  • Provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the unfair contract terms law

‘ASIC will review small business lending contracts across the market. There are no excuses for failure to comply with the UCT laws, and we will consider all regulatory options available to us if we identify lenders whose unfair contracts break the law.’

ASIC will monitor the four banks’ use of the clauses to ensure they are not applied or relied on in an unfair way. ASIC will also examine other lenders’ loan contracts to ensure that their contracts do not contain terms that raise concerns under the unfair contract terms law.

ASIC and ASBFEO will continue work together to ensure small business loan contracts comply with the unfair contract terms law.

Download REP 565

Background

Unfair contract terms protections were extended to small business from 12 November 2016.

ASIC and the ASBFEO have been working with the big four banks to ensure their small business loan contracts meet the standards that are required by the unfair contract terms law (refer: 17-139MR).

Small business loans are defined as loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections.

In August 2017, ASIC and the ASBFEO welcomed the changes to small business loan contracts by the big four banks (refer 17-278MR) that have:

  • Ensured that the contract does not contain ‘entire agreement clauses’ which prevent a small business borrower from relying on statements by bank officers (e.g. about how bank discretions will be exercised)
  • Limited the operation of broad indemnification clauses
  • Addressed concerns about event of default clauses, including ‘material adverse change’ events of default and specific events of non-monetary default (e.g. misrepresentations by the borrower)
  • Limited the circumstances in which financial indicator covenants will be used in small business loans and when breach of a covenant will be considered an event of default
  • Limited their ability to unilaterally vary contracts to specific circumstances with appropriate advance notice.

The Problem Of Introducers, and HEM

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….

On The Banking Royal Commission

The first full day contained a number of significant revelations, including that millions have been paid by the banks in remediation, the fact that some entities appeared not to be fully cooperating with the Inquiry and others admitted conduct “falling below community standards and expectations”.

Remediation includes $250m to 540,000 home loan customers, relating to fraudulent documents, poor processes and failure in responsible lending practices.  In addition $11m remediation was paid to to 34,000 card customers relating to responsible lending. Also $128m was paid relating to add on services, including a significant amount for car loan add ons and  $900,000 for home loan add ons relating to 10,500 consumers. Also remediation of $90m was paid relating to car loans to around 17,000 consumers relating to fraudulent documentation and responsible lending obligations.

I discussed the issues raised by the first day of the current hearing rounds on ABC Illawarra this morning.

A good summary also from Australian Broker, looking at the NAB “Introducer Programme”.

Banks’ mortgage practices came under heavy scrutiny on Tuesday, as the Royal Commission began the second round of hearings in its inquiry on misconduct in the financial services industry.

Prime Minister Malcolm Turnbull announced the Royal Commission in November last year, to investigate how financial institutions have dealt with misconduct in the past and whether this exposes inherent cultural and governance issues.

According to ASIC figures, banks have paid almost $250m in remediation to almost 540,000 consumers since July 2010 for unacceptable home loan practices. Reuters data show that Australia’s four largest banks – CBA, ANZ, Wetpac, and NAB – hold about 80% of the country’s $1.7trn mortgage market.

During Tuesday’s hearing, officials shone a spotlight on National Australia Bank’s (NAB’s) “introducer program,” which paid third party professionals for referring their customers to the bank for loans. Unlike brokers, they are not required to be licensed or regulated by the National Credit Act.

NAB fired 20 bankers in New South Wales and Victoria last year and disciplined 32 others, after the bank’s review identified around 2,300 home loans since 2013 that may have been submitted with incomplete or incorrect information.

According to Rowena Orr, a barrister assisting the Royal Commission in Melbourne, the bank derived more than $24bn-worth of home loans when the misconduct took place from 2013 to 2016. “The introducer program was extremely profitable for NAB during the period where misconduct occurred, she said.

The Introducer Program still operates up to this day, with some 1,400 “introducers.” There were about 8,000 of them from 2013 to 2016, said NAB banker Anthony Waldron, who was put forth as a witness for the inquiry.

In an open letter released on Monday, NAB CEO Andrew Thorburn described the incident as “regrettable and unacceptable.” He said the bank has made changes to the introducer program, and has also cooperated with the Royal Commission’s requests for information over the last few months.

“The simple fact is that none of these issues are acceptable. They should not have happened in the first place, and they show that we haven’t always done right by our customers or treated the community with respect. This is not good enough,” Thorburn added.

Can central bankers become Superforecasters?

From Bankunderground.

Tetlock and Gardner’s acclaimed work on Superforecasting provides a compelling case for seeing forecasting as a skill that can be improved, and one that is related to the behavioural traits of the forecaster.

These so-called Superforecasters have in recent years been pitted against experts ranging from U.S intelligence analysts to participants in the World Economic Forum, and have performed on par or better by accurately predicting the outcomes of a broad range of questions. Sounds like music to a central banker’s ears? In this post, we examine the traits of these individuals, compare them with economic forecasting and draw some related lessons. We conclude that considering the principles and applications of Superforecasting can enhance the work of central bank forecasting.

Setting the scene

It is helpful to begin by considering the purpose of forecasting in central banks, and how the process works in practice.  This speech by Gertjan Vlieghe explains how forecasting is an important tool that helps policymakers diagnose the state and outlook for the economy, and in turn assess – and communicate – the implications for current and future policy. So achieving accuracy is not always the sole aim of the forecast. However, forecasts are also a means to provide public accountability of central bank actions, and the presence of persistent or significant forecast errors may damage the credibility of the policy making institution amongst key stakeholders (individuals, governments and financial and capital markets).

A typical forecast set-up at a central bank is (see here) supported by two pillars: i) statistical frameworks underpinned by specific (for example, New Keynesian General Equilibrium) economic concepts, which can be supported by tools that process a range of economic and financial data, and ii) monetary policymakers’ judgements and deliberations that overlay these strict model-based forecasts – all of which form part of the deliberation process.

The accuracy of such forecasts has come under much scrutiny (see here) since the financial crisis, resulting in a great deal of effort to improve their performance. Several reviews and studies (see Stockton (2012), BoE IEO (2015), FRBNY Staff Report (2014) and ECB WP 1635 (2014)) have evaluated forecast performance across many major central banks and suggested improvements in calibrating economic models (e.g. to reduce bias), challenging prior conventions more and learning more from other central banks/economic forecasters.  The BoE’s MPC for example has also started commenting on its own ‘key judgements’ in its quarterly Inflation Report.

This is all welcome progress. But this iterative process from inside the central banking community over time leaves us with an impression that improving forecast performance could benefit from further considering the successes of forecasting  in other fields (similar to taking an “outside view” when forecasting as described by Kahneman). We may then move forward from this process of gradual evolution… to a potential revolution.

EnterSuperforecasting

Superforecasters have been described as “unusually thoughtful humans on a wide spectrum of problems”. They are drawn from necessarily diverse backgrounds, and include amateurs and experts in a given field. They compete in tournaments which test their judgements on a range of questions about economic or geopolitical events. And through making these predictions they are expected to hone a range of forecasting skills. They are judged on several measures (including a daily average ‘Brier score’ – a measure of forecast accuracy originally proposed to test weather forecasting), and they receive their title by consistently outperforming a top percentile of their peers.

Superforecasters were first identified on the back of The Good Judgement Project (now a private enterprise), which was part of a US Intelligence Agency program in 2011. The GJP’s testing team included renowned advisors from psychology, statistics and economics. Their work used personality trait tests and training methods to reduce cognitive biases and improve the forecasting abilities of their volunteer forecasters. They then identified individuals who consistently out-performed their peers. Subsequent studies of this experiment found that when these top forecasters were placed in teams with other such forecasters  (described here as ‘group of average citizens doing Google searches in their suburban town homes’), they performed around 30% better than the average for intelligence community analysts who had access to confidential intercepts and other relevant data. Pretty Super-ising results one might say!

Can central banks become this ‘super’?

The story so far could imply that the answer simply lies in replacing central bank forecasters with these Superforecasters and leaving them to it. However, central bank forecasting is as much about forming a coherent economic narrative (the preserve of economists) as it is about numerical accuracy (for which the traits that make these individuals outperform the ‘experts’ matter). Central bankers may have a comparative advantage in the former, but their forecasting can be enhanced by considering key behavioural traits of those responsible for forecasting.

So how do central bankers fare against these Superforecasters?

The similarities: Superforecasters (most importantly) have a ‘growth mind-set’, which is a real willingness to address why a forecast is different from its eventual outcome, rather than just an ex-post evaluation of whether the prediction was correct. They also demonstrate a good balance of data and judgements when forming conclusions, not placing undue weight on either one.

Central bankers in comparison likely fare favourably against these traits, given most major central banks provide detailed updated assessments (the ‘why’) accompanying changes to their forecasts on a regular (usually quarterly) basis. At the BoE, these follow a substantial consultation process between staff and policymakers.

Some differences:

Using the wisdom of crowds: Another key trait of Superforecasters is that their forecasting abilities are enhanced when working in diverse teams – with people drawn from a range of disciplines, levels and areas of expertise. This enables them to tap into the well-known concept of the wisdom of crowds, and the process reportedly leads to better forecasts by providing a more stimulating environment for debate. Results are further aggregated to give more weight to forecasters who have a better track-record.

The central bank forecasting process does incorporate some elements of this – for example, many central bank policymakers make decisions in committees, after debate and exchanging views.  Moreover, several central banks regularly use surveys of external economic forecasters as an input to the forecasting process, or draw on external views, e.g. the use of the Agency or Market Intelligence networks to gather views in the BoE.

But (we would assert that) the forecasting outputs do not benefit in the same way as the Superforecasting process, where particular behavioural traits, a mix of expert/non-expert opinions or previous track records of those forecasters are considered.  Engaging a wider cohort of participants in forecasting could address this.  One suggestion would be to createCitizen Economists – as suggested by Andy Haldane in this speech, who argued that the wisdom of crowds can be harnessed by regularly canvassing the views of the public on the economy. Central banks could consider creating an online platform that engages the public directly with forecasting – which might also improve public understanding of policy and the economy (the RSA’s Citizen Economic Council and the Bank’s recently announced Citizen Panels for example intend to achieve a similar purpose). Central bankers can use these as an input into their own forecast process (perhaps even publishing the alternative crowd sourced forecast, similar to the way that the Fed publishes a staff forecast alongside the FOMC’s official one), though policymakers would remain accountable for their own forecasts and any policy decisions based on them.

Competing forecasts: A further avenue to explore is whether central banks might engageexternal Superforecasters (who aren’t constrained by the same institutional challenges as central banks) to produce their own macro-economic forecasts. Superforecasters currently partner with organisations (e.g. humanitarian or policy-making) around the world on topics ranging from geopolitics, future currency movements, and economics. In a similar vein, central banks could use Superforecasters’ macro-economic forecasts alongside their surveys of external economic forecasters as an additional input to the forecasting process.

Central Bank Superforecasters: Central banks could also try to identify and train their owninternal economic Superforecasters, by employing the same techniques of cognitive training, team-work and result aggregation as another additional input to the forecasting process. One part of such a programme could be the continual assessment of forecasting performance, as measured by Brier scores.

Conclusions

With continuous forecasting challenges on the horizon in coming years, perhaps it is an opportune time to incorporate these ideas in the central banking sphere. Economic forecasting will always be an imperfect science. So while it is unlikely that a major shock such as the global financial crisis would have been averted by improving the accuracy of forecasting efforts in these ways, we believe the lessons learnt through the experiment of Superforecasting have a lot to offer to take forecasting a step forward in that direction.  Potentially over time, we might be able to create a next generation of central bank Superforecasters.

 

Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

 

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.”

Wealth Management A Risk To Wells Fargo

Wells Fargo’s review of its wealth management business threatens to broaden its reputational damage, according to Moody’s.

Last Thursday, Wells Fargo & Company filed its annual 10-K report with the US Securities and Exchange Commission. The report disclosed the existence of an ongoing review by Wells Fargo’s board of directors into potentially inappropriate referrals or recommendations at its Wealth and Investment Management (WIM) business, as well as a separate company review of fee calculations within WIM that resulted in overcharges for some customers. The existence of these reviews is credit negative.

Before last week’s disclosures, Wells Fargo’s inappropriate sales practices centered on its large retail banking operations. Since September 2016, when Wells Fargo first announced regulatory settlements related to retail banking sales misconduct, the bank has also disclosed issues in its auto lending business and in its assessment of fees for mortgage rate-lock extensions. These disclosures have resulted in significant reputational damage.

Consequently, we believe Wells Fargo’s reputation would suffer further if inappropriate practices were found in its nationwide WIM business.

Wells Fargo has made rebuilding trust its top priority, and over the past year and a half has taken numerous credit-positive steps to strengthen its governance and risk oversight. However, the widespread nature of Wells Fargo’s wrongdoing also resulted in a broadly publicized consent order with the US Federal Reserve that restricts the bank from growing its balance sheet beyond its year-end 2017 size and calls for more enhancements to its governance and risk management.

These circumstances, and the heightened scrutiny that Wells Fargo faces, magnify each additional revelation of inappropriate practices. Therefore, although the newly disclosed reviews into Wells Fargo’s WIM business are in their preliminary stages, we believe they undermine the bank’s effort to rebuild trust.

Moreover, the board’s review into whether there have been inappropriate referrals or recommendations affecting WIM’s brokerage and other customers was initiated in response to inquiries from US government agencies, raising the possibility of another regulatory sanction at the conclusion of the review. Similarly, Wells Fargo’s filing highlighted a separate internal review of policies, practices and procedures in its foreign-exchange business that is also a response to inquiries from government agencies.

Wells Fargo’s 10-K also included a report from its auditor, KPMG, in which KPMG expressed an unqualified opinion on Wells Fargo’s financial statements and an unqualified opinion on the effectiveness of its internal controls over financial reporting. This is positive because it indicates that Wells Fargo’s auditors do not believe the bank’s aggressive sales practices compromised its financial reporting in any material respect.

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.”

ASIC Winds Up Payday Lending Companies for Unpaid Fines

ASIC says it has obtained orders winding up Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (BurleighHeads) Pty Ltd (the FAF Companies) for their failure to pay fines for breaching consumer credit laws. Mr Anthony Castley of William Buck has been appointed as the liquidator.

In March 2017, the Federal Court fined the FAF Companies a total of $730,000 after finding, in proceedings brought by ASIC, that the FAF Companies breached consumer credit laws by engaging in credit activities without holding an Australian credit licence.

The FAF Companies operated under a business model where consumers seeking small value loans were required to sign documents which purported to be for the purchase and sale of diamonds in order to obtain a loan. The reality was that there were no diamonds and it was  a sham designed to avoid consumer credit laws.

Background

ASIC was successful in obtaining orders against the FAF Companies in September 2015 and fines were imposed in March 2017 (refer: 13-205MR and 17-060MR).