Tag: Banking Remuneration

APRA Proposes New Remuneration Standards

APRA) has released a draft prudential standard aimed at clarifying and strengthening remuneration requirements in APRA-regulated entities.

This is in response to the fact that in the financial sector, APRA has observed an over-emphasis on short-term financial performance and a lack of accountability when failures occur, especially among senior management. 

In a discussion paper released today for consultation, APRA has proposed creating a new prudential standard to better align remuneration frameworks with the long-term interests of entities and their stakeholders, including customers and shareholders.

Draft prudential standard CPS 511 Remuneration introduces heightened requirements on entities’ remuneration and accountability arrangements in response to evidence that existing arrangements have been a factor driving poor consumer outcomes.

The proposed reforms address recommendations 5.1 to 5.3 from the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which were endorsed by the Government in February. 

The package of measures is materially more prescriptive than APRA’s existing remuneration requirements and will place Australia in line with better international remuneration practice.  


Among the key reforms, APRA is proposing: 

  • To elevate the importance of managing non-financial risks, financial performance measures must not comprise more than 50 per cent of performance criteria for variable remuneration outcomes; 
  • Minimum deferral periods for variable remuneration of up to seven years will be introduced for senior executives in larger, more complex entities. Boards will also have scope to recover remuneration for up to four years after it has vested; and
  • Boards must approve and actively oversee remuneration policies for all employees, and regularly confirm they are being applied in practice to ensure individual and collective accountability.

APRA flagged its intention to strengthen prudential requirements on remuneration in April last year following its Review of Remuneration Practices at Large Financial Institutions. The need for a strengthened approach was further underlined by the findings of last year’s Prudential Inquiry into the Commonwealth Bank of Australia, as well as the recent industry self-assessments examining issues on governance, accountability and culture.

APRA Deputy Chair John Lonsdale said it was clear that existing remuneration arrangements in many entities were not incentivising the right behaviours.

“Remuneration and accountability frameworks play an important role in driving employee behaviour. Where policies are poorly designed, or not followed in practice, companies may incentivise conduct that is contrary to the long-term interests of the company and its customers. 

“In the financial sector, APRA has observed an over-emphasis on short-term financial performance and a lack of accountability when failures occur, especially among senior management. 

“This has contributed to a series of damaging incidents that have undermined trust in both individual institutions and the financial industry more broadly. Crucially from APRA’s perspective, these incidents have damaged not only institutions’ reputations, but also their financial positions,” Mr Lonsdale said.

Mr Lonsdale said CPS 511 would complement the Banking Executive Accountability Regime to lift industry standards of accountability and reduce the likelihood of misconduct.

“Limiting the influence of financial performance metrics in determining variable remuneration will encourage executives to put greater focus on non-financial risks, such as culture and governance. As our recent response to the industry self-assessments made clear, this remains a weak spot in many financial institutions.

“Introducing the minimum holding periods for variable remuneration ensures executives have ‘skin in the game’ for longer, and allows boards to adjust remuneration downwards if problems emerge over an extended horizon.

“APRA will not be determining how much employees get paid. Rather, we want to empower boards to more effectively incentivise behaviour that supports the long-term interests of their entities. By reducing the risk of misconduct, we hope to see better outcomes for customers and higher returns for shareholders in the long-term.

“We recognise that some aspects of this proposal are far-reaching and will require major changes to industry practices. APRA will listen closely to feedback from impacted stakeholders to determine if our proposed approach is correctly calibrated to achieve its intended outcomes,” he said.

A three month consultation period will close on 22 October. APRA intends to release the final prudential standard before the end of 2019, with a view to it taking effect in 2021 following appropriate transitional arrangements.
Copies of the discussion paper and the draft Prudential Standard CPS 511 Remuneration are available on the APRA website at: Consultation on remuneration requirements for all APRA-regulated entities.

Shadow treasurer says government has ‘got it wrong’ on trail

In a clear stance on Labor’s trail position, Chris Bowen MP has said that the government’s response to the banking royal commission has “got it wrong”, particularly in regard to its “backflip” on removing trail from next year; via The Adviser.

Speaking at the AFR Banking & Wealth Summit on 26 March, Chris Bowen, shadow treasurer and federal member for McMahon, reaffirmed the Australian Labor Party’s stance on trail commission payments to mortgage brokers.

In the final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, commissioner Kenneth Hayne recommended that “changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers”.

Following the release of the report, the Coalition government’s official response initially suggested that it would seek to ban trail for new loans from 1 July 2020, but Treasurer Josh Frydenberg announced earlier this month that government would instead postpone any decision on removing trail until after a review of mortgage broker remuneration has been undertaken in three years’ time.

Meanwhile, the Labor Party’s response called for the removal of trail for new mortgages from 1 July 2020 and for a standardised upfront commission as a proportion of the loan amount. It suggested that commissions should be capped at 1.1 per cent “so that banks can’t offer brokers incentives to choose their products”.

‘A big tick to a big flick’

Speaking at the AFR Banking & Wealth Summit today, Mr Bowen slammed the government for its “backflip” on trail commissions, stating that they continued to “get it wrong” on the royal commission recommendations.

He said: “I’m normally not too partisan at these events, I normally steer away from political commentary – at least through much of my speech, but given we are at the business end of the term, with the federal election less than 50 days away, I’m sure you’ll appreciate some plain speaking.

“The choice is between an opposition prepared to make big calls, and get those calls right, versus a government that has got the big calls wrong.”

Mr Bowen outlined that commissioner Hayne was “very clear” in his observations, which he said included the observations that “the interest of customers was relegated to second place far too often; too often, consumers were being left in the dark about how products or services are acquired and delivered; and too often, financial services entities were breaking the law and not held to account for their actions”.

“Those actions that were revealed through the royal commission had given the entire sector a bad name,” Mr Bowen said.

“They needed, and need, to be dealt with. These are systemic failures in our financial services industry when it comes to providing community standards and expectations.”

Emphasising that the government had previously called the royal commission a “populist whinge”, “regrettable”, a “reckless distraction” and a “QC’s complaints desk”, Mr Bowen added: “They got the big call wrong. And they also continue to get it wrong now, in terms of the recommendations.

“That’s probably most clear in relation to mortgage brokers.”

Mr Bowen elaborated: “A few days after the royal commission was handed down, the government told us that they were implementing the royal commission recommendation on trail commissions and said the royal commission recommendation was getting a ‘big tick’. No nuance, no discussion, just simply that this would be implemented.

“Now the reasons given by the commissioner on this issue were clear: The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing, [he said].

“And these are not new issues. The Productivity Commission found trail commissions have the effect of aligning the broker’s interests with those of the lender, rather than those of the borrower. The case was clear.”

Mr Bowen therefore called the government’s change in stance on trail as “a backflip with triple pike”.

“Just weeks after giving a recommendation a big tick, it was given the big flick,” he said, noting that it took “just 35 days to backflip on a major reform of phasing out trailing commissions for mortgage brokers”.

However, the shadow treasurer said that “there was, and is, a strong case for thinking carefully about the royal commission recommendation and ensuring we protect competition in banking. That’s exactly what we did,” he said.

“We consulted with mortgage brokers, we consulted with banks and financial institutions – particularly the smaller ones.

“We came up with a different way of removing conflicted remuneration for mortgage brokers. We announced that we would have legislated a flat upfront commission rate to avoid mortgage brokers’ advice being conflicted by the rate of the commission offered,” he said.

Mr Bowen concluded: “It’s one thing to achieve the objectives of the royal commission recommendation in another way, as Labor has done; it’s another thing to completely abrogate any policy action, as the Treasurer has done.

“When we make big calls – and we’ve made quite a few of them – we stick to them, fight for them, and seek to mandate for them, which is what we’ll be doing, presumably, on the 11th of May [for the federal election].

“We will implement 75 recommendations of the royal commission in full. The government cannot say that and already we are seeing consumer groups being very concerned that the government is already walking away from other recommendations,” he said.

Broking industry continues engagement with ALP

While the shadow treasurer has reaffirmed the party’s stance on trail commissions, the broking industry continues its work in engaging and educating ALP members on the benefits of trail.

Indeed, just last week, a group of nearly 100 representatives from the mortgage industry met shadow assistant treasurer and federal member for Fenner, ACT, Dr Andrew Leigh, at the QT Hotel in Canberra for the Future of Mortgage Lending forum, organised by AFG in partnership with Connective and Mortgage Choice, in which the need for trail was hotly discussed.

Speaking to The Adviser about the event last week, AFG’s Mark Hewitt said that the purpose of the meeting was to have a town hall type discussion with economist-turned-politician Dr Leigh, and to outline how Labor’s plans to remove trail for new loans from next year could impact borrower outcomes.

“We wanted to get the point across to Dr Leigh about the unintended consequences of abolishing trail and the impacts that could have on the brokers’ ability to provide an ongoing service to their clients,” Mr Hewitt said. 

“Labor’s focus was very centred on talking about them being the first to move on commissions, but the sentiment in the room was definitely around the abolition of trail and why it was not a good idea. 

“What was particularly impressive to me was the care and concern that the brokers in the room had for their customers and also their concern about the unintended consequences of having their remuneration front-loaded in the way that Labor is proposing.” 

He continued: “We were talking about the impacts that the removal of trail might have on brokers’

to provide ongoing service to clients and also the fact that the model without trail doesn’t provide any incentive for an ongoing customer relationship.” 

Mr Hewitt told The Adviser that Dr Leigh “was very receptive to the messages in the room and was very impressive and engaging”. 

“It takes a fair bit of courage as well, as he was the only person in the room who thought that abolishing trail was a good idea, but he stood by the party line while still engaging and being respectful to the counter arguments,” Mr Hewitt said.

“We were very pleased with how it went because it’s a continuing conversation – and it was a two-way conversation, hearing both sides, which is what we wanted to achieve,” AFG’s general manager for broker and residential added.

‘Conflicted’ remuneration should go: ASIC Chair

From The Adviser.

The new chairman of the ASIC has said that he has been “surprised” that there has been “reluctance, and often resistance, to addressing conflicts, especially those embedded in remuneration” – highlighting the broker remuneration report.

Speaking at the Australian Council of Superannuation Investors Annual Conference on Thursday (17 May), the chairman of the Australian Securities and Investments Commission (ASIC) told delegates that he had been “surprised” by several themes and issues in the financial services sector since taking up the helm of the regulator three months ago.

In his speech, ASIC chair James Shipton said: “My concern is that many people in finance have lost sight of the ultimate purpose of the financial system; they have forgotten that this system is about managing other people’s money…

“I worry that many financial services companies have become insular by focusing only on how they can maximise earnings.

“Accordingly, the first job of the sector is to refocus on these core purposes, instead of exploiting opportunities to make money from its customers often to the consumer’s considerable detriment. This is exemplified by the proliferation of conflicts of interest in parts of the financial sector.”

Noting that conflicts are a “perennial challenge for business”, he added that it was “clear” to him that a number of institutions “have not taken the management of conflicts of interest to heart”.

Mr Shipton said: “This is verging on a systemic issue. Indeed, it is the source of much of the misconduct ASIC has been responding to and which is being highlighted by the Royal Commission hearings.

“The inappropriate sale of financial products in caryards by a commission-driven salesforce is but one example that ASIC has tackled in recent times. And yet conflicts of interests are not new.

So, what has surprised me is that:

  • many Australian financial firms have turned a blind eye to the risks that conflicts pose to customer outcomes as their businesses evolved or grew;
  • they didn’t have a management system, a management culture, or codes that were attuned to identifying and resolving conflicts; and
  • there has been reluctance, and often resistance, to addressing conflicts, especially those embedded in remuneration – even when ASIC pointed them out.”

According to Mr Shipton, this “resistance has, at times, extended to a reluctance to make good any harms caused by conflicts”.

He continued: “Too often, unacceptable conflicts were justified by firms on the basis that ‘everyone else is doing it’, even though it’s the right thing to do to end them.

“A business culture that is blind to conflicts of interest is a business culture that does not have the best interests of its customer in mind. Moreover, it is one that is not observing the spirit as well as the letter of the law.

“And so, it is time for Australia’s financial services sector to remember its purpose – and remember always that they are dealing with other people’s money; it must focus on the outcomes it delivers to its customers.”

Mr Shipton therefore called for a “wholesale review by firms to identify, manage and, if appropriate, remove every conflict.

“Only when this is done can the journey of rebuilding trust with our communities begin,” he said.

Looking back at removing ‘conflicted’ broker commissions

While he said that ASIC favours this option in relation to conflicted payments in advice, he highlighted how the ASIC review of broker remuneration highlighted the “desirability of removing at least some of the remuneration-related conflicts in this sector”.

The new ASIC chair said: “In recent years, the Australian Parliament has banned commissions and other conflicted payments in financial advice. This was a recognition that the best way to deal with some conflicts was not to manage or disclose them, but to remove them altogether.

“This is an option that ASIC favours in relation to conflicted payments in advice. There can be no ambiguity in this area. So, I would strongly suggest that all financial firms keep this in mind when considering how to deal with conflicts of interest arising from remuneration structures.

“We have, for example, in our report on mortgage broker remuneration, highlighted the desirability of removing at least some of the remuneration-related conflicts in this sector.”

While the ASIC report suggested that volume-based and bonus commissions could create conflicts, and should be removed (a suggestion that the industry has largely accepted and is working on implementing, via the Combined Industry Forum), the report did also conclude that the standard model of upfront and trail commissions “creates conflicts of interest”.

ASIC’s report 516: “This standard model of upfront and trail commissions creates conflicts of interest. There are two primary ways in which these conflicts may become evident.

“Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan)…

“Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’,” the report read.

The ASIC remuneration review did not, however, suggest radically changing the commission structure.

It put forward six proposals to improve consumer outcomes and competition in the home loan market, including:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.

While no response from government has yet been made regarding what changes, if any, should be made to broker remuneration, it is largely expected that no such response will be made public until the royal commission and Productivity Commission conclude their work on the financial services sector.

APRA seeks improvement in executive remuneration practices

The Australian Prudential Regulation Authority (APRA) today released the results of a review of remuneration practices at large financial institutions which found considerable room for improvement in the design and implementation of executive remuneration structures.

The review examined whether policies and practices in regulated institutions were meeting the objectives of APRA’s prudential framework: that remuneration frameworks operate to encourage behaviour that supports risk management frameworks and institutions’ long-term financial soundness.

APRA’s review comprised detailed analysis of executive remuneration practices and outcomes from a sample of 12 regulated institutions across the authorised deposit-taking institutions (ADIs), insurance and superannuation sectors. The sample of institutions reviewed collectively accounts for a material proportion of the total assets of the Australian financial system.

The review found that remuneration frameworks and practices did not consistently and effectively promote sound risk management and long-term financial soundness, and fell short of the better practices set out in APRA’s existing guidance.

Chairman Wayne Byres said APRA encouraged all regulated institutions to review their remuneration frameworks and address any areas where APRA’s findings indicated room for improvement.

“Both the design and implementation of performance-based remuneration must support effective risk management and the long-term financial soundness of each institution. In this regard, there is considerable room for improvement,” Mr Byres said.

The report identified the need for improvement in:

  • ensuring practices were adopted that were appropriate to the institution’s size, complexity and risk profile;
  • the extent to which risk outcomes were assessed, and weighted, within performance scorecards;
  • enforcement of accountability mechanisms in response to poor risk outcomes; and
  • evidence of the rationale for remuneration decisions.

In response to the findings, APRA will consider ways to strengthen its prudential framework. A future review of the relevant prudential standards and guidance will take account of the forthcoming Banking Executive Accountability Regime (BEAR), as well as international best practice.

Mr Byres said: “APRA does not believe institutions should be satisfied with simply meeting the minimum requirements on remuneration.

“Well-targeted incentive schemes and firmly enforced accountability systems should be viewed not simply as a matter of regulatory compliance but as essential for sustained commercial success.

“Boards and senior executives should consider the findings of this review and take action to better align their remuneration arrangements with good risk management and the long-term soundness of their institutions.”

Any revisions to the prudential framework will be subject to APRA’s usual practices of stakeholder consultation and engagement.

Copies of the publication are available on APRA’s website at: http://www.apra.gov.au/CrossIndustry/Documents/180328-Information-Paper-Remuneration-Practices.pdf.

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.

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.

 

 

 

Rate Transparency Could ‘Diminish’ Broking Industry

From The Adviser.

The Bank of Queensland has told the Productivity Commission that greater visibility of mortgage rates could make the mortgage broker proposition less compelling for consumers.

Appearing before the Productivity Commission, the bank’s CFO, Anthony Rose, said that “greater transparency [could] see a diminished utilisation of the broker space”.

“We have seen that the broker market has certainly been beneficial in allowing the non-major banks compete in the mortgage space,” Mr Rose said.

Commission chairman Peter Harris acknowledged that smaller banks have been “assisted by the broker revolution and have saved the need to occupy branch space in [more] locations”.

“You’re saying, therefore, if the pricing impact did encourage more people to look for a branch, then the entities with the biggest branch network are advantaged by that,” Mr Harris said.

When asked whether the Bank of Queensland, which receives 25 per cent of its home loans through the third-party channel, has had to re-strategise in response to vertical integration, Mr Rose admitted that the bank has been monitoring aggregator ownership structures with concern.

“We thought that those that own aggregator networks should actually be required to publish the degree of flow relative to their market share for the public interest to understand whether is there anything to see here or not,” the CFO said.

“To be honest, the information that you’ve provided in your report is new information to us as well but doesn’t surprise us. It’s hard for us to access that information as well.”

Representatives from both the PC and the Bank of Queensland agreed that the lack of publicly available data has made it difficult to measure the actual impact aggregator ownership has had on the flow of mortgages in Australia, though Mr Harris has previously suggested that bank-owned aggregators control about 70 per cent of the mortgage broking market.

As such, the Bank of Queensland supports the PC’s proposed duty of care obligations, which would require the Australian Securities and Investments Commission to impose a clear legal duty on lender-owned mortgage aggregators to act in the best interests of the consumer.

“We do think that’s important because the degree to which major banks are getting flow of business over and above their natural market share is, in effect, market access that would have been available to the non-big four that is no longer available to us for whatever reasons that are driving that outcome,” Mr Rose said.

“It does appear that there is quite a trend towards an over-allocation of flow back into the proprietary products of the owned business, which I think is addressed by putting that duty of care obligation in.”

Bank Says Broker Fees Would Remove Conflicts

From The Adviser.

The Productivity Commission (PC) had posed the question in its draft report into competition in the Australian financial system of whether consumers should pay service fees, with the aim of finding out if such a model would ensure consumer interests are being served without any conflicting commercial influence.

In a public hearing on Wednesday (28 February), Travis Crouch, divisional CFO for revenue at Bendigo and Adelaide Bank, contended that a “fee-for-service brokerage [would] remove the inherent conflicts involved in a commission-based structure and ensure fees earned are aligned with the value of the service provider”.

The representative explained that the bank relies less on mortgage brokers than other banks, as its primary focus for the last two decades has been on developing a strong branch network.

“We have been focused on the development of a strong branch network primarily since the advent of our community banking model, some 20 years ago, where communities can open a branch of a Bendigo Bank as a franchisee. That remains a reverse enquiry model… We’re not out there selling to a community that you should open a community bank; rather, [the] community comes to us and [says], ‘We would like to open a branch’,” Mr Crouch told the PC in the hearing.

“There is a significant process including feasibility studies [that] they need to go through to show that they could be successful. But we continue to increase our branch footprint primarily through that community bank model.”

Mr Crouch further explained the difference between the organisation’s Adelaide Bank and Bendigo Bank brands, saying: “Our brand that we use in the broker market is the Adelaide Bank brand. The Bendigo Bank brand is our retail offering through our retail and community bank network. The Adelaide Bank brand is effectively an online brand once you take out the mortgage through a mortgage broker.”

Trail “an absurd option”

In response, a PC representative commented that if Adelaide Bank is ultimately an online brand, paying trail commissions must be an “absurd option”.

“For the average loan, $665 per year in perpetuity for an online-based product seems very expensive,” the PC said.

“You presumably have very little choice about that because, as you say, you have to play in the market.”

The Bendigo and Adelaide Bank representative agreed with the comment, drawing back to why the bank believes that a fee-for-service model is “more appropriate”.

Mr Crouch did not, however, deny the importance of brokers, saying that it would be a “brave decision to not participate in that market”, given that “roughly half of Australians [are] choosing to select a mortgage by going to a broker”.

When asked about whether the bank has had to make “either/or” decisions around opening branches in the same location as brokerages, Mr Crouch noted that it has separate strategies for its retail and broker businesses.

“The reality is both are generally competing in the same market, whether that be a geographic market or anything else, and quite often you’ll find one of our branches in the same shopping strip as an outlet of a major broker. So, it is not an either/or in our organisation,” the CFO explained.

“I can’t think of a time when we made a decision around our branch network based on ‘should we actually use a third party in that particular space’.”

While the bank is in support of consumers paying service fees to brokers, its representative acknowledged that “such a change will have significant and varied implications, which will need to be carefully considered before such a change is implemented”.

The proposed monetisation model has been met with criticism from the aggregator and broker community, with Connective director Mark Haron previously telling The Adviser that if brokers charged a fee for service, the Australian broker population would decline significantly, which, in turn, would negatively impact the non-major banks and non-banks that depend on brokers for business. It was his contention that such a model would decrease competition in the Australian financial system.

The major banks — which already control more than 80 per cent of all owner-occupied housing loans and 85 per cent of investor housing loans, according to the Australian Prudential Regulation Authority — would therefore gain additional market share if consumers chose to go directly to banks for their loans in order to avoid paying broker fees, Mr Haron said.

The Connective director also warned that a fee-for-service model could make financial advice less accessible to customers who need it the most, such as first home buyers, and further noted that, by managing home loan applications, brokers actually reduce the workload for banks.

“[Brokers are doing] the work that the banks would have to do themselves, so it’s only fair that the brokers get remunerated by the banks,” the director said.

Broker commissions ‘far aligned’ from customer interests: PC

From James Mitchell at the Adviser.

The chairman of the Productivity Commission has said that while it may be in the interests of the bank and the broker to limit churn, it is not in the interests of the borrower.

Speaking at the Committee for Economic Development of Australia (CEDA) in Melbourne on Monday, Productivity Commission chairman Peter Harris reiterated some of the questions raised in the commission’s draft report into competition in the Australian financial system, which scrutinised broker remuneration and the purpose of trail commissions.

Despite ASIC finding last year that broker remuneration was generally sound and only required some minor changes to “improve” the structure (largely to do with soft dollar benefits), the productivity commission said it was “considering making a recommendation to the Australian government on the matter of trail commissions and commission clawbacks”.

The PC is also questioning whether consumers should pay brokers a fee for service.

Speaking on Monday, Mr Harris said: “Despite some recently announced industry changes to parts of the commission payment structure, commission earned by brokers remains far from aligned with the interests of the customer.

“Trailing commissions are an example of that. These are only paid while a customer remains with a loan. They are worth $1 billion per annum. There is nothing immaterial about them.

“The industry itself has said that trailing commissions are designed to reduce churn and manage customers on behalf of banks.

“Despite the hint to the contrary, we do actually understand quite well why it might be in a bank’s interest and a broker’s interest to jointly limit churn.

“But not the customer’s interest, who (the data is surprisingly unavailable, as noted earlier) is most probably paying for the service.”

He continued: “Given the unhappy experience with misaligned incentives in wealth management, being able to substantiate the assurance that a broker is acting in the customer’s best interest would seem to be pretty desirable today.”

He said that the commission would “prefer” that banks imposed this interest via contract rather than have the standard introduced via regulation. (However, the commission’s chairman added that as the commission has no power to recommend what banks do, it has instead proposed regulation in the draft report.)

“It would have been valuable to put the cost-benefit side by side”

Once again, the chair highlighted a data gap in the industry, stating that he believes the “default position among data holders in this industry is set against transparency”.

“[W]e were genuinely surprised to find that they either do not hold data at all on some important aspects of decision making, or for another reason could not supply them,” Mr Harris said, stating that “the cost of mortgage brokers is quite high”.

Mr Harris added that brokers cost $2,300 for the average loan of $369,000, plus a trailing commission of $665.

He said: “Other analysts have suggested higher numbers than these in high-priced locations, but we will stick with national averages.

“More than $2.4 billion is now paid annually for these services. Some in the broking industry want to know why there is suddenly attention being paid to commissions.

“The sum I just cited, as a large apparent addition to industry costs since the mid ’90s, by itself suggests a public analysis of why it is so large might be in order.”

He argued that the $2.4 billion figure “becomes problematic when it is also suggested that customers aren’t burdened by this as they don’t pay these costs”, adding that “anyone with a slight amount of common sense knows that somewhere in any product purchase it is only a customer or a shareholder who could be paying this charge, unless offsetting costs have been stripped out”.

Mr Harris continued: “Shareholders returns are pretty constant, so we would have liked to unpack that cost question a little, to see if the price was supported by cost savings. With the data provided by banks, this proved to be near impossible.

“For smaller banks, we were able to develop some estimates of the branch costs they would potentially face, without broker assistance. But we received insufficient information from most (not all) banks, and so could not create a clear picture.

“Thus, we can’t say whether there has been a net improvement in efficiency, even as a large sum in commissions has been added to industry costs. We have also shown in the report that brokers do produce slightly better rates for their clients than going in to the bank branch. But that benefit for consumers has been declining since the GFC. It would have been valuable to put the cost-benefit side by side.”

Mr Harris also took aim at vertical integration, suggesting that bank-owned aggregators control about 70 per cent of the mortgage broking market.

He added that in-house products or white label loans appear to “dominate disproportionately” the outcomes for borrowers who use bank-owned aggregators.

The PC chair noted that, in 2015, the Commonwealth Bank had 21 per cent overall market share in the broker channel but a 37 per cent market share via Aussie Home Loans.

However, while it has concerns about vertically integrated groups, the Productivity Commission said that forcing banks to divest of their broking businesses should be “a last resort”.

“Of course, if the necessary solutions prove commercially unpalatable, institutions themselves may then choose to divest,” Mr Harris said.

Many in the industry have spoken out against the Productivity Commission’s draft report, with some suggesting that the remuneration figures cited are “incorrect”, others stating that the recommendation to charge fees would be “anti-competitive”, and both broker associations calling out some findings of the report (which relied heavily on figures from CHOICE consumer group and UBS reports) as “limited”, “amateur” and — in some cases — “nonsense”.

Productivity Commission and Mortgage Brokers

From Australian Broker.

Productivity Commission chairman Peter Harris defended his agency’s criticism of broker commission in its report on competition in financial services, as he highlighted again the high cost of mortgage brokers.

Speaking at a Committee for the Economic Development of Australia event yesterday, Harris said more than $2.4bn is now paid annually for mortgage broker services.

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.

“Some in the broking industry want to know why there is suddenly attention being paid to commissions. The sum I just cited, as a large apparent addition to industry costs since the mid-90s, by itself suggests a public analysis of why it is so large might be in order.”

Harris said the amount becomes problematic when some parties suggest that consumers do not bear this burden as they do not pay commission costs.

“Which is a comment surely made for Twitter – since anyone with a slight amount of common sense knows that somewhere in any product purchase, it is only a customer or a shareholder who could be paying this charge, unless offsetting costs have been stripped out,” he said.

Harris also cast doubt on industry changes to broker remuneration structures. He said that despite announced changes to parts of commission payment schemes, broker commission remains far from aligned with consumer interests.

He zeroed in on trailing commissions – which he said are worth $1bn per annum – and questioned their relevance.

“The industry itself has said that trailing commissions are designed to reduce churn and manage customers on behalf of banks. Despite the hint to the contrary, we do actually understand quite well why it might be in a bank’s interest and a broker’s interest to jointly limit churn,” said Harris.

“But not the customer’s interest – who is most probably paying for the service.”

Harris said the Productivity Commission preferred that banks imposed on brokers the duty of ensuring they act in consumers’ best interests, “perhaps via contract”.

“But we have no power to recommend what banks do for themselves, so we have instead a draft report that proposes regulation,” he said.

The commission is moving into the public hearing stage this week, and will submit its final report on 1 July.