Category: Economics and Banking

Interesting piece today from Mortgage Professional Australia.

ASIC’s review of mortgage broker remuneration is in data collection mode currently, though ASIC says it will then follow up on the data, which could lead to another round of consultation. Later in the year, ASIC will prepare its report and deliver it to Government by December 2016. The review could well touch on vertical integration, licensing, and commissions. For example in the UK, there have been a shift towards fee-based advice, rather than commission.

ASIC’S reviews into mortgage broker remuneration, which was announced last year, has become an increasing source of frustration for brokers and for ASIC itself.

Brokers feel there’s a lack of communication on the progress of the review – as we noted in our MPA 16.3 report, ‘Untangling ASIC’  – while ASIC feels the industry has prematurely turned against them.

At ASIC’s 2016 Annual Forum in March, MPA asked deputy chairman Peter Kell about the progress of the review. Kell responded: “There seem to be a lot of people in the sector who believe ASIC – without even really commencing the whole review – has already made its mind up on exactly what it is going to find and what recommendations it is going to make. I assure you this is not the case. This will be a very open and transparent review.”

Finally that transparency is becoming apparent. In mid-March the MFAA and AFG published their full responses to ASIC’s ‘Scoping Discussion Paper’, completing the preliminary phase of ASIC’s review. The scoping paper, which was made available to industry players and individual brokers in February, is essentially a list of 15 questions covering three areas: the home lending market, remuneration structures and consumer outcomes. It closed for submissions on 11 March.

The questions were mainly predictable, asking what ASIC should prioritise in its review; whether other factors should be examined; about existing structures (ie of commission) and trends which could change those structures. Respondents were also given the chance to add extra comments, and ASIC listed the data it planned to request, including ownership structures, product descriptions and customer satisfaction results.

All in all, it is not exactly a riveting read. However, it’s not been the only way ASIC has engaged the industry. Two roundtables held in Sydney and Melbourne brought together brokers, bankers, associations, consumer advocates, the RBA and the ABA (Australian Bankers’ Association) to discuss the same three areas examined in the Scoping Discussion Paper.

Although participants weren’t obliged to make their responses to ASIC publicly available, and ASIC’s roundtables were private, the MFAA and AFG, at the time of writing, had decided to make their full responses public, while the FBAA had earlier in March commented on the progress of the roundtables. The AFG also announced the launch of a consumer campaign to gather opinions from consumers about brokers.

Vertical integration
Those responses that have been published are unnervingly direct. “There is little doubt that those aggregators that are majority-owned by a lender have the potential to be influenced by that lender,” commented AFG, saying “distortion of the market is a risk”. AFG, which is publicly listed and 5% owned by Macquarie Bank, argues that conflict of interest “diminishes as the level of common ownership decreases … Our view is that the threshold level of interest that should be disclosed to consumers is 20%”.

That figure, AFG says, is consistent with the recommendations of the 2001 Corporations Act. AFG suggests that bank-owned aggrega-tors could forego making a profit on their aggregator services in order to expand the distribution of their products, the reason being that “the cost of distributing a product is modest compared to the income that can be gained from the interest margin”.

AFG also claims that vertical integration within banking – particularly the acquisition of non-major banks – can lead to confused consumers, such as “applicants choosing to refinance a loan from Westpac to Bank of Melbourne without being made aware that the Bank of Melbourne is a wholly-owned subsidiary of Westpac”.

AFG acknowledges its support from banks  – “some lenders make payments of sponsorship or contributions to development programs based on metrics such as the volume, quality and conversion of loans written” – while insisting these payments are not passed on to brokers.

Defending commission
Bank-owned aggregators also make a fee-for-service model problematic, claims AFG, “as the parent lender would be in a position to absorb the cost of their brokers, whereas non-aligned brokers would need to charge the consumer a fee”. It cites the Netherlands, where commissions have been banned, as an example. AFG further argues that removing commissions would lead to a salaried workforce “with no incentive to ensure a thorough comparison across lenders or products”, and advises ASIC to examine mobile lenders.

The MFAA also defends commissions in its response: “mortgage broker commissions are structured in a way that ensures the broker provides professional services and assistance for the life of the loan”. The MFAA also calls for parity and quicker payment of commission by lenders, and tells ASIC that, while average commissions have fallen, “in parallel, broker costs, compliance requirements and client engagement per file have all increased”.

When it came to the scope of ASIC’s review, the MFAA argued that commission associated with reverse mortgages, self-managed super funds and commercial lending should be excluded from the review. “The MFAA does not believe that remuneration from these products has a material impact on remuneration in respect to residential mortgage products.”

ASIC should, however, look at non-monetary rewards, the MFAA advises. “The MFAA would like access to non-monetary rewards to be clear and measurable, and that a willingness to participate does not create a bias towards any one industry participant over another.” Bankwest’s Stewart Saunders, commenting during MPA’s recent Non-Major Bank Roundtable discussion, noted that ASIC’s review  “goes beyond a review of commissions as it also looks at the non-financial benefi ts that brokers receive”.

While the MFAA and AFG note the importance of commissions to brokers’ livelihoods, it is consumer outcomes that interest ASIC and that get the most attention in responses. AFG agrees that “commissions can lead to conflicts of interest in many situations” but disputes that this is currently the case, and claims there’s no data to support this (as does the MFAA). Banning commissions would lead to “anti-competitive behaviour from lenders with branch networks”, and a reversal of the driving down of interest rates over recent decades. “Every mortgage customer will pay for reduced competition throughout the life of their loan.”

Calling out unlicensed referrers 
While many brokers would agree with these arguments, ASIC can hardly be surprised that two established industry players would choose to defend commissions. However, when MPA asked Kell what were the key takeaways from consultation with the industry, he highlighted a different issue.

“One area we have realised that possibly does need some vision or focus is the growth in so-called ‘introducers’ in the mortgage broker space, who seem to have a less formal role in helping to bring customers to brokers and lenders  … There are potentially some conflicts of interest that need to be looked at,” Kell said.

Both the MFAA and AFG have advised ASIC to examine unlicensed referrers and introducers.  “Credit repair agents, mortgage introducers, new property sales (spruikers) and solicitor funding providers often receive a benefit from their involvement in the market,” commented the MFAA, “without regulation or declaration of interest.” The scope should therefore be widened to include all participants who could be compensated for being involved in the property market.

AFG turned the spotlight on lenders, warning that “some larger lenders are seeking to increase originations by focusing on referrals from unlicensed sources”, off ering commissions of up to 60 basis points to “real estate agents, community groups, solicitors, accountants, fi nancial advisers, property developers, wealth creation specialists, builders, charity foundations, clubs and associations”. ASIC should look at how these services are provided and disclosed in the context of the NCCP regulations, AFG argues.

If ASIC does include referral arrangements in its remuneration review, this could of course be a concern to brokers, given many brokers rely on paid referral arrangements with real estate agents, financial planners and accountants. If fees are involved these arrangements are meant to be disclosed; ASIC may encounter yet another level of complexity with brokerages that are owned by real estate agents, just as they are concerned about brokerages owned by banks.

Why don’t we hear more?
When announcing the publication of its scoping paper response and the launch of its consumer campaign, AFG managing director Brett McKeon made a number of thought-provoking comments to Australian Broker magazine. “There is a certain amount of fragmentation within the industry,” McKeon noted. “Some groups don’t have the dollars to invest in representing their members well, and others are owned by banks, which builds conflict at times with these inquiries and how they respond to them.”

Just as McKeon implies, there’s been little noise made by large franchises, banks and aggregators – as opposed to individual brokers – about ASIC’s review, which is surprising given its relevance across the broking community. It’s likely that many industry players are defending commissions ‘behind closed doors’, which, as FBAA CEO Peter White told MPA in our ‘Untangling ASIC’ report, can be more eff ective in getting results.

Nor is it fair to say that banks themselves have been silent on the issue. In our recent Non-Major Bank Roundtable we asked banks what the consequences of the review could be, and almost all were unwavering in their support of commissions (see their responses in the boxout below). That doesn’t mean they’ve necessarily been that supportive when talking to ASIC, but it’ll be encouraging to brokers.

As McKeon notes, the danger for the existing commission model could be whether banks act as a single unit, under the direction of the ABA and the majors. “Some of the smaller banks get 80% or 90% of their business from the third-party channel, so you would hope they would be vocal in their support rather than just be part of an ABA submission which will largely, I think, try and muddy the waters.” AFG has asked the banks to disclose whether they’ve put in a submission on the topic, McKeon added. “It would be interesting to see if we can get any of them to be transparent.”

Conclusion
ASIC’s remuneration review could therefore prove an interesting ‘litmus test’ for the industry, revealing who’s invested in the existing status quo and who would like to see it disrupted. Groups with a foot in both the lender and broker camps, namely the MFAA, will be hoping to avoid any climate of suspicion developing as a result. If other scoping paper responses are published, or if AFG does get disclosures from the banks, this could be averted.

The next stage of the review process, which lasts from March to April, will see ASIC collect data and could therefore be somewhat more mundane for the industry. After April, ASIC says it will follow up on the data, which could lead to another round of consultation, much like with the FSI, and give brokers a better idea of how lenders are approaching commission. From September to December, ASIC will prepare its report and deliver it to government; there’s no timeline determining how the government will act.

What the data reveals could also see ASIC change course, particularly if the fragmented state of customer service feedback in the industry – which was noted in the MFAA’s submission – becomes clear in the data ASIC collects. Given that customer outcomes is what matters most to ASIC, broker groups that have systematised their collection of feedback, and have good net promoter scores, perhaps have the least to fear. Brokers whose feedback is adhoc, or clearly unbalanced, may want to revisit their CRM processes for that period after the loan has settled.