Tag: Banking Remuneration

Flat fee model will hammer consumers: FBAA

From Australian Broker.

Calls by consumer advocacy groups to scrap upfront and trail commissions and bring in a flat fee for brokers will lead to negative consumer outcomes, the head of a leading industry association has warned.

Dramatically changing the current commission structure would alter the dynamics of the industry and significantly reduce the amount of operators working with it, Peter White, executive director of the Finance Brokers Association of Australia (FBAA), told Australian Broker.

In a time before brokers, interest rate margins were much higher than current times, he said, with these margins dropping to a more reasonable level once brokers finally entered the market. Introducing a fee for service would reverse this trend, he added.

“If we disassemble the marketplace, the impact is that margins would go up even further with the banks. The service levels would also drop away because it was the brokers who introduced home delivered services to the home loan sector.”

Product enhancement and development would also be affected, he said, with brokers helping supply consumers with new and innovative products from branchless banks and non-bank lenders which depend on the third party channel.

“The commission model as it stands is fair across the full marketplace. The regulators aren’t suggesting drastic changes; it’s only the consumer advocacy style people who say that this should happen. Nobody else in the marketplace is saying this because it is only benefit after benefit that brokers have brought in.”

While White admitted there were a very small minority of dodgy brokers in the industry, he said that upending the commission model was not the way to sort this out.

“Every now and again you come across brokers who you know shouldn’t be in the game and you do what you can to get them out. But this is the same for any industry. If someone’s going to be a crook, they’re always going to be a crook. What you need to do is to find them, get them out, and put them behind bars.

“Even with a fee-for-service structure, they’re still going to be crooks. The issue is that if you turn around and destroy the commission structure or make huge, significant changes, you’re going to have reduced competition in the marketplace, worse service standards, higher interest rate margins, and very bad consumer outcomes.”

The commission structure is intrinsically linked to competition because at the end of the day the broker offers a service that the lender normally provides, White said.

“As far as finding a client, it saves the lender advertising dollars. When you look at the loan process, the things that a lender normally does are being done by a broker. The lender has already marginalised that cost into their branch network. It’s actually a cheaper marginalisation cost to cover a broker’s fee or to pay commission.”

The current commission structure also ensures that smaller deals are financially viable for the lenders, White said, adding that the flat fee model would mean banks lose money on these deals unless they bring interest rates up.

“The bank has to make sure they make money on those transactions. There’s an intrinsic problem of pushing up interest rates because of smaller loan sizes. And if you then suggest putting in a tiered flat fee structure, what’s the point in that? The commission structure deals with that variable anyway. On the smaller transactions, the broker gets paid less but the client gets looked after.”

White said that the FBAA has approached consumer groups like CHOICE with these issues in the past.

“Unfortunately, they’ve got a very blinkered approach to the world and don’t really want to sit down and have discussions with you. You’ve also got to be very cautious because anything you say to them can be taken in different directions.”

“I was a part of the audit committee for some research they did a couple of years ago. The data was taken from about 18 people looking for loans but they saw that as being symptomatic of a much bigger issue in the whole sector. There were some issues that came out of that which were relevant to industry but it didn’t prove it was a symptomatic, systemic, industry-wide issue.”

While consumer advocates said these results were just the tip of the iceberg, they were more likely the entire iceberg, White said.

“It’s not like there’s an issue with 10% or even 1% of the marketplace. The number of claims or issues that occur on a monthly basis are very, very small compared to the total size of the marketplace.”

Banks commit to negotiating commission changes

From Mortgage Professional Australia.

The Australian Bankers Association wants commissions to be decoupled from loan size but is prepared to negotiate with brokers to find a new model, it has announced.

In an exclusive interview with MPA, the ABA talked through its submission to the Treasury and its views on commissions, volume related bonuses, soft dollar and self-regulation. “The ABA doesn’t have any preconceived ideas about the exact figures of the new [commission] model: what we are doing is working through the combined industry forum,” an ABA spokeswoman told MPA.

The combined industry forum, which involves the ABA, MFAA, FBAA and COBA, first met in June and is scheduled to meet later this month, with the broad objective of responding to ASIC’s remuneration review. Participants hold a range of different views, with the ABA telling MPA that “we do believe that the standard commission model will need to be de-linked from loan size”

However, the ABA played down suggestions of major changes to commission: “we don’t think that the concept of upfront and trail should be abandoned: we think that the entire model needs to be considered in the light of what promotes good customer outcomes”

Under the shadow of Sedgwick

The recommendations of the Sedgwick Review look likely to determine the ABA’s stance on questions of remuneration.

The ABA says Sedgwick’s recommendations ‘intersect’ with those of ASIC: Sedgwick called for commissions to be completely decoupled from loan size by 2020, but the ABA told MPA this was a final deadline: “banks are taking immediate steps to see how they can implement the Sedgwick recommendations but are we mindful about how these can be worked through with the rest of the industry.”

Although previously criticised for taking unilateral action, the ABA stated that “in terms of activity outside the forum, the ABA’s energy is invested in pursuing the objectives of the forum and our member banks are also committed to implementing the recommendations of the [Sedgwick] Review.”

ABA supports self-regulation

The combined forum has been portrayed by MFAA CEO Mike Felton as a potential basis for industry self-regulation and the ABA hesitantly support this view.

Although the initial objective of the forum was to respond to ASIC, the ABA told MPA, its purpose did “not necessarily” end there: “depending on the Government’s response and acceptance of the solution, we would look at self-regulatory mechanisms to implement it.” In principle the ABA supports self-regulation on the basis it can drive change “more quickly, and avoid unintended outcomes for industry and consumers.”

Consumer advocates criticised self-regulation for inadequately representing consumer interests. However, the ABA told MPA this was unfair: “an immediate objective of the forum is to set up an appropriate and responsive channel to socialise our thinking with consumer groups and obtain their feedback. We’ll be acting on that quickly: it’s not in response to the submission: it was always our intention of the forum.”

Mortgage Broker Commissions In The Spotlight

Significant lobbying is now underway to influence Treasury in the final outcome of the mortgage broker commission changes, bearing in mind the recent ASIC review called out some fundamental conflicts in the current model, and highlighted that consumers do not necessarily get the best outcomes. Importantly, ASIC says the standard model of upfront and trail commissions creates conflicts of interest.

ASIC has put forward six proposals to improve consumer outcomes and competition in the home loan market:
(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.
The current idea appears to be to let the industry self-regulate. But that, to some appears to be a cop-out!

As we discussed in an earlier post – The Truth About Mortgage Brokers, “consumers should be using a mortgage broker with their eyes open. Ask yourself if the broker is truly working in your best interests”.

 

In a joint submission to the Treasury, consumer advocacy group CHOICE, along with the Financial Rights Legal Centre, Consumer Action Law Centre and Financial Counselling Australia, called for:

– the removal of upfront and trail commissions;
– the implementation of fixed fees (via lump sum payments or hourly rates);
– the removal of bonus commissions, bonus payments and soft dollar payments; and
– a change in law so brokers have to act in the ‘best interest’ of clients; and
– a requirement that brokers disclose ownership relationships and the lender behind any white-label loan recommended to a consumer.

CHOICE, which has strongly criticised the broker channel in the past, said it was “simply not good enough” that ASIC “has left it up to the industry to find a solution”.

The group suggested that the way mortgage brokers are currently paid “means it’s very unlikely that a customer is going to get a loan that’s best for them” and that the industry therefore needed a “major change”.

CHOICE’s head of campaigns and policy, Erin Turner said: “We’ve called for urgent action on trail commissions, monthly payments from a lender to an aggregator which is passed on to a broker over the life of a loan.

“A lender pays out an average of $750 per year for the life of a home loan through trail commissions. Trail payments are money for jam. The broker makes money for doing nothing, discouraging them from reviewing the quality of a loan long term.”

However, as reported in The Advisor, the peak broker bodies – the MFAA and FBAA have called this submission “ignorant” and “misinformed”, which perhaps is unsurprising, as these bodies are strongly aligned with the current mode of operation.  They slammed the recommendations as “detrimental” to consumer interests.

The executive director of the Finance Brokers Association of Australia (FBAA), Peter White, said the groups had “no regard for the competitive position and incredible value proposition that brokers bring to home loan borrowers”.

He went on to say it was “very concerning” when “misinformation is disseminated by those claiming to be consumer advocates, but who don’t tell the truth”.

Mr White suggested that, without the competition of brokers and non-banks, interest rates would still be around the 7.5 per cent mark (rather than 4 per cent).

He added that the suggestion of a flat fee would actually lead to a rise in interest rates.

“The average loan amount nationally is around $450,000 and the average commission is 0.60 per cent, meaning a flat fee, commercially, would be around the $2,700 mark,” he said.

“In regional markets, where loan sizes are smaller, a loan of $200,000 would (in the current structures) pay around $1,200 and not $2,700 in a flat-fee model, and lenders would never wear such a loss.”

Mr White said the groups also claim that mortgage brokers are giving advice, yet that’s not the case.

“Under the regulations that govern mortgage brokers, they give credit assistance and are doing work on behalf of the lender, which is why the lender pays them a commission and it has no bearing on the interest rate the borrower pays.

“If you don’t use a broker you go to a bank which still has the administration costs for the loan, so it’s cheaper for the bank to originate a loan through a broker than at a branch.”

He said the suggestion to abolish trail commissions is “an ignorant position to take”.

Speaking of the consumer groups in question, he said: “If they knew their subject matter, they would know that trail commission is paid to brokers to offset costs of providing ongoing customer service and to manage the borrower’s ongoing and variable lending needs as required under the national consumer credit protection regulations.

“There is absolutely no evidence to suggest trail incomes harm competition.”

Changes would ‘significantly harm the interests of consumers’

The Mortgage & Finance Association of Australia (MFAA) also released a statement, saying it was “disappointed” by the consumer groups’ submissions and comments, adding that they would “significantly harm the interests of consumers they claim to represent”.

Touching on the consumer groups’ proposals, Mike Felton, CEO of the MFAA, said: “A fee-for-service model may suit lenders, but it would drive the majority of brokers out of the industry. This removal of access to brokers for Australians would severely reduce competition in the industry, which is something we are trying to avoid for consumers.

“A single, lender-funded, fee-for-service would lead to a standardisation of all fees, which we believe ASIC itself does not support and we believe would also be considered anti-competitive by the ACCC,” Mr Felton said.

He continued: “I do not see how removing brokers from the industry, and consolidating power back in the hands of banks, serves the needs of consumers.”

Mr Felton highlighted a 2015 Ernst & Young study that found that 92 percent of consumers reported they were ‘satisfied’ or ‘very satisfied’ with their broker’s performance, and highlighted that consumers have increasingly turned to brokers to arrange their home loans – with more than 53 per cent of all mortgages written by the third-party channel.

He concluded: “This is also about access to finance for Australians. If you live in a regional or rural area, you may not have access to a bank branch – or you may have access to one bank branch. Brokers provide regional Australians the same access to finance as people who live in inner Sydney or Melbourne and it is critical that we should avoid doing anything to negatively impact that.”

Mr Felton said that the proposals also did not reflect the concerns raised by ASIC.

He commented: “ASIC understands that brokers drive competition and provide a critical service to consumers that combines choice, expertise and convenience, to help them make informed choices and get the most appropriate deal…

“When you are obtaining a mortgage, there is a lot more at stake than just the interest rate. Brokers assess the needs of their customers in detail, both now and into the future and recommend products and lenders that suit these needs.”

Both associations said that they have been actively working with ASIC, Treasury and a number of other key stakeholders on different ways to improve the commission structure to enhance consumer outcomes.

Separately, a submission from Mortgage Choice, also discussed by The Adviser, has told the Treasury that the current upfront commission structure for brokers is “sound” and should not be changed to reflect the loan-to-value ratio of mortgages.

In its submission to ASIC’s Review of Mortgage Broker Remuneration, seen by The Adviser, Mortgage Choice said it was generally “supportive” of ASIC’s review, but argued that the current, standard commission model was “sound” and some proposals may be hard to implement.

Touching on the first proposal, which focuses on “improving” the standard commission model so that brokers are not “incentivised purely on the size of the loan”, Mortgage Choice suggested that no such changes should be implemented.

Writing in the submission, company secretary David Hoskins said that Mortgage Choice believed the current model is “sound and delivers positive consumer outcomes”, adding that the upfront commission structure “appropriately compensates the broker for the time and effort required to lodge an application and take it through to approval”.

He elaborated: “The time and effort involved in this process is significant, it requires the broker to forensically assess the customer’s needs, future needs, income, asset position as well as living expenses, review the current offerings in the market and match the same with a suitable solution.

“The payment of trail commission encourages the broker to put the customer in a product that will be suitable for the consumer over the long term.”

The submission also noted ASIC’s finding that there are more interest-only loans in the broker channel, and higher LVRs and loan amounts, but emphasised that this is due to “the demographics of the customers who choose to use a broker and the more complex needs they bring to the table, as well as brokers actively looking for solutions that meet their customers long-term needs”.

“We do not believe that brokers, in general, place loans with the sole intent and purpose of receiving additional commission,” it said.

Looking at ASIC’s example of changing commissions to “reflect the LVR [loan-to-value ratio]”, Mortgage Choice said it would “not be correct” to suggest that it would be effective to change the shape or quantum of broker commissions based on LVR, interest-only or lower loan amounts.

The submissions reads: “Broker economics need to line up with lender economics and consumer outcomes. Markets already price for risk and return driving both lower LVRs and higher loan amounts through discount pricing to the end customer. Unless the regulator is intent on dictating the discounting regimes set by lenders, then the only truly effective mechanism available to the regulator is through being more prescriptive in lender underwriting policy or shaping the economics at the lender end to drive an increase in consumer pricing at the higher risk end of the market.”

When it comes to bonus commissions and bonus payments, Mortgage Choice said it did not believe that these types of payments were a “significant influencer” in terms of where a broker places a loan, and revealed that it only received such payments from two lenders.

Noting that the amount received from its bonus payments was “not significant” and is “pooled and shared with brokers based on the volume of business they write across the lender panel”, it added that it was “not opposed” to the removal of these payments in the industry as it would align it with other parts of the financial industry (bonus commissions and payments have been removed from the financial planning and life insurance sectors).

The brokerage was also supportive of the removal of soft dollar benefits that could influence broker decisions, but thought lender sponsorship and aggregator conferences and events should not be removed if they are linked to broker professional development. “These are essential to the progression and increased professionalism of brokers in our industry,” it said.

Likewise, it said that hospitality benefits “such as tickets to sporting events or concerts” should be advised to the relevant aggregators to enable appropriate monitoring.

Change lender policy and pricing

Indeed, the company position said that if ASIC wishes to change the shape and nature of mortgage lending through broking or through the lending system then there are “two significant levers that need to be used: lender credit policy and lender pricing”.

Mr Hoskins writes: “Influencing lender credit policy would ensure borrowing levels are appropriate based on servicing, LVR and repayment restructure (IO v P&I). By varying lender policy, the regulator can essentially adjust the loan portfolio characteristics…

“Brokers work with borrowers to obtain the most cost-effective lending solution. To suggest that a broker would encourage a customer to borrow more or to borrow at a higher LVR would not be an effective business outcome for a broker who would very easily lose a customer relationship if they did not find a competitively priced lending solution. Furthermore, lender pricing to consumers follows the economics of lending in that the larger the loan the larger the profit for the lender and as such, lenders typically offer larger drive discounts for larger loans. Accordingly, in certain situations, customers’ needs may be well served if they were to borrow just enough to cross the next pricing tier and then place the additional funds in an offset account.”

Mortgage Choice concluded that for commissions, the current structure is “sound”, adding that the “shape and the quantum” of initial and ongoing commission is similar to the commission structures to be adopted in the life insurance industry.

Lastly, Mortgage Choice emphasised that the remuneration review and the ASIC industry funding model review were “inextricably linked” and should be considered together if the end goal is delivering positive consumer outcomes.

It explains: “Ensuring a company has responsibility for governance and oversight is critical to providing good customer outcomes.”

The response outlines that it is “comfortable” with the idea of a new public reporting regime and requirements for more broker oversight, but warned that aggregator and lender information would need to focus on a loan, customer and broker specific level, rather than an overarching view.

Commission changes to be decided by industry, not ASIC

From Mortgage Professional Australia.

Broker remuneration will be decided by the industry rather than by regulators, the MFAA has indicated. So immediate changes are unlikely as the Treasury lets MFAA, FBAA, ABA and COBA begin self-regulation.

In an exclusive interview with MPA and Australian Broker, MFAA Mike Felton explained that; “ASIC and the Treasury have been very clear with all the meetings that we’ve had that they’ll give the industry a chance to self-regulate.”

Felton made the claim as the MFAA submitted its views on ASIC’s Review of Mortgage Broker Remuneration to the Treasury. Self-regulation will be led by the four industry associations involved in June’s industry forum: the MFAA, FBAA, Australian Bankers Association and Customer Owned Banking Association.

According to Felton, ASIC and the Treasury have not set a deadline for self-regulation: “if we continue to show progress we will be given the time to make meaningful changes to the extent it stalls then I believe a timeline will be appropriate.”

Instead, the industry will set its own timeline at a meeting in mid-July, with Felton commenting that “the next six months will be a very busy period.”

Key issues and the ‘positive-sum approach’

In its submission to Treasury, the MFAA gave an indication of the viewpoints it will carry into self-regulation.

The MFAA has warned that ASIC’s suggestion of determining commission partly by LVR was “potentially suitable but [could involve] unforeseen consequences”, particularly for first home buyers, tax-gearing investors and brokers who put extra work into high LVR loans. They have dismissed suggestions of flat fees, standardised upfront commission or that commission size could be solely determined by complexity.

With regard to volume-based incentives, the MFAA says paying VBIs to brokers should be “urgently done away with” and that campaign bonuses should be removed. The MFAA says broker clubs should remain but entry should be based on a balanced scorecard and bonuses should not include increased commission.

Overall Felton says the MFAA want to promote competition and not leave any participant in the value chain worse off, with a “positive-sum approach”.

The cost of self-regulation

MFAA members will not experience increased costs as a result of self-regulation through the combined industry forum, Felton has promised: “it’s not going to cost them a cent; we have it budgeted into our expenses and it’ll be costing them nothing.” Whilst the forum won’t cost MFAA members extra, the increased governance, monitoring and oversight that could emerge from it will have costs that need be borne by the industry as a whole, says Felton; “we will need to decide how best to do that.”

“The cost to us is significant,” added Felton, “but the time and effort have been worthwhile; that’s what associations do for their members; it’s at times like these associations step up and make sure these review processes are informed.”

As difficult as herding cats?

With self-regulation depending on four very different associations cooperating over an extended period, there is potential for things to go wrong.

The Sedgwick Review was an example of the ABA taking unanimous action without consultation and was roundly criticised upon its release. Under intense political pressure, banks could be tempted to take further unanimous action. Felton did not have a plan to deal with such a situation, but portrayed it as unlikely:“one cannot predict all eventualities; I think for the moment we have a combined industry forum, it is absolutely committed to the task and we’ll take it one step at a time.”

Ultimately commission structure is decided between a lender and aggregator and it is possible an aggregator could reject the new regulations, but according to Felton “at this stage, it is unanimous across the entire aggregation panel that everybody wants to be involved with this process of self-regulation.”

The next industry forum will take place in mid-July; MPA will be reporting on the results of that and other associations’ submissions to the Treasury.

Banks and brokers in remuneration talks

From The Adviser.

Representatives from the mortgage broking industry have met with the Australian Bankers’ Association to discuss proposed remuneration reforms.

The ABA, which instigated the highly contentious Sedgwick review, met with the Mortgage and Finance Association of Australia (MFAA), the Finance Brokers Association of Australia (FBAA) and the Customer Owned Banking Association (COBA) on Friday, and held a discussion forum with key industry participants including bank and non-bank lenders, aggregators and brokers to progress reform.

The forum, held on Friday, 9 June in Sydney, was recognised by participants as an opportunity for the industry to understand the key issues in response to ASIC’s proposals for mortgage broking; the potential impact to aggregators and lenders; and the overlap with the Sedgwick review.

While the ABA has given little information about what was discussed, the association’s executive director of retail policy Diane Tate said the meeting was “an important step” for the industry to work together on options for an industry-based response to calls for changes in the mortgage industry.

“We have heard these calls to change incentives and governance arrangements and we look forward to working with the industry, in consultation with the government and subject to all competition law obligations, on reforms to support good customer outcomes,” she said.

The FBAA’s Peter White said the forum was “a unique step forward” for the third-party channel.

MFAA chief executive Mike Felton said the discussions are a “crucial step” in the process of determining how the industry responds to the challenges of addressing ASIC’s proposals on broker remuneration, ensuring the sustainability of the industry going forward.

“This meeting demonstrates that our industry is serious about self-regulation and has the maturity to work together across different stakeholder groups to effect the required change and ensure customer outcomes continue to remain front of mind,” Mr Felton said.

Both the FBAA and MFAA were scathing in their reponse to the Sedgwick review, which included a number of proposed changes to the way brokers are paid.

Following the release of the report, Mr Felton said the association was “frustrated” by Sedgwick’s proposals, which he said were essentially recommending a consolidation of power to lenders, giving them complete oversight of mortgage brokers.

“This would lead to a reduction in independence, would do little to enhance competition and tip an already precarious power balance further towards the big four and away from consumers’ interests,” he said.

Meanwhile, the Mr White said the release of the ABA-funded Sedgwick review was making recommendations to banks, which “seem to be taking it as gospel”, and influencing regulators before any decision has been made by ASIC, Treasury or the minister.

“The banks and the ABA unquestionably must stop this attempted regulatory manipulation through the Sedgwick report and allow the works of ASIC and Treasury, and then the minister, to make the appropriate determinations without manipulation driven by self-interest, greed and poor consumer and industry outcomes,” he said.

The FBAA, MFAA and ABA will hold further discussions in the coming months, with all participants committing to work in consultation with Treasury and government stakeholders on an industry-led response.

Industry denounces ‘ridiculous’ UBS report

From The Adviser.

Broker associations and several members of the industry have slammed a recent UBS report that claimed mortgage brokers are “overpaid”, saying that the data is “wrong” and the findings are “ridiculous”.

In an analyst note entitled, Are mortgage brokers overpaid?, analysts Jonathan Mott and Rachel Bentvelzen argued that the new bank levy could be offset by the banks if they cut broker commissions.

The analysts suggested that broker commissions exceeded $2.4 billion in 2015, and added 16 basis points, or $4,600 to the cost of a mortgage.

The damning note went on to argue that the cost of broker commissions are factored into how a bank costs its home loans, which the UBS analysts said were then borne by mortgage customers.

“Although mortgage broker commissions are paid by the bank, not the customer, commissions are factored into the bank’s cost of funding and have been a driving factor in mortgage repricing in recent years,” they said.

Touching on the ASIC and ABA reports on mortgage broker remuneration, the UBS analysts claimed that the bodies had “called for sweeping changes to the way brokers are remunerated”.

It also referred to an 18 per cent “blow out” in commissions paid to brokers since the financial year 2012 and said there was an “unrealistic economic rent being extracted by the mortgage broking industry”.

The analysts concluded that “while a mortgage is a large financial commitment, it is a simple, commoditised product” and could therefore “be easily provided by robo-advice”.

Report is ‘garbage’

Several members of the industry have lambasted the note, stating that the analysis is using incorrect data and thus drawing unfair and damaging conclusions.

Peter White, the executive director of the Finance Brokers Association of Australia, called the report “garbage” and said that the average broker commission was between $2,500 and $3,000 a deal (not the $4,500 quoted by UBS).

Speaking to The Adviser, Mr White said: “This report is way off the mark. To me, it just doesn’t make sense. The data is flawed and before they start making comments, they need to ensure that they have information that is actually backed by fact.”

He continued: “To suggest that there are 16 basis points added to every mortgage because of a broker’s involvement is the most ridiculous comment to make. It’s the most ridiculous comment I’ve seen in the last 12 months. The reality is you pay the same rate in the bank as you do through a broker, so where did that come from? It’s the same interest rate.”

Mr White concluded: “The report is garbage and I’m really disappointed that UBS has gone out and released something that is so fundamentally flawed. UBS is a global bank, it shouldn’t be making these sorts of mistakes. It makes them lose all credibility in the marketplace.

“UBS need to restructure their research department. They are certainly not doing their job and they are an embarrassment to UBS.”

MFAA ‘extremely frustrated’ by report

The Mortgage & Finance Association of Australia (MFAA) also said that it was disappointed by the tone of the note, and argued that several points were either “incorrect” or “misleading”.

Backing the value of brokers, the MFAA said that working with a customer to secure a mortgage can be extremely complex and often requires months of work from a broker (not to mention the subsequent years as the broker supports the customer for the life of the loan), and goes far beyond what robo-advice can offer.

MFAA CEO Mike Felton commented: “Complexity gravitates towards the broker channel (as does the need for service) and brokers go to great lengths to help these clients find a suitable mortgage product.”

Mr Felton also said he thought UBS’ commissions calculation was wrong, stating that they had divided the total amount of broker commissions in 2015 (which included upfront and trail commission) by the number of loans written by brokers in 2015.

He said: “This has given them a commission per mortgage that is about double what it actually is in the year of acquisition.”

The MFAA CEO added that an “interrogation of the data demonstrates that the increases to total remuneration to the broking channel are not due to changes to commission structures”, but due to “the simple fact that every year, more Australians are turning to brokers,” Mr Felton said.

“We are extremely frustrated by this report,” he added, concluding that the MFAA was “extremely disappointed that a reputable organisation would issue a report like this without ensuring that the data they’re working with is correct”.

‘A bank extolling the virtues of banks’

Both associations emphasised that the ASIC report had also not recommended “sweeping changes”, but instead “improve” the standard commission model, and highlighted that the ASIC report actually recognised the value in mortgage brokers – with chairman Greg Medcraft telling the media after the release of the report that brokers deliver “great consumer outcomes”.

The interim CEO of aggregation group AFG, David Bailey, said that it was important to note that the UBS report was issued by a company that owns an investment bank.

“This is a bank extolling the virtues of banks”, he said.

Mr Bailey added that UBS’ “elevation of the ABA’s Sedgwick Review to being a significant analysis of the broking industry is quite frankly outrageous”.

“We have said all along that the ABA Review is nothing more than the opinions of a single interest group, the banking lobby group. How can a review of the broking industry not have any serious involvement from the very sector it is purporting to review? And furthermore, why conduct the review when the regulator is already doing so with significantly more scope and analysis?,” he said.

“Secondly, UBS extol the virtues of robo-advice. With over 3,400 loan products sitting within our mortgage broking technology, we believe that a mortgage is anything but a commoditised product…

“We find it simply ridiculous that these conclusions can be drawn and reported as fact,” Mr Bailey concluded.

UBS: mortgage brokers a $2.4bn waste of money

From Mortgage Professional Australia.

Broker commissions are “an illustration of excesses built into the financial system” according to a damning report on brokers by UBS.

Yesterday the global investment bank sent out an analyst note entitled ‘Are Mortgage Brokers Overpaid?’ which argued that broker commissions, which they state exceeded $2.4bn in 2015, should be cut.

UBS analysts Jonathan Mott and Rachel Bentvelzen wrote that “Average commissions are now $4,600 per mortgage, which we believe is disproportionate for advice provided on a simple, commoditised, single product, particularly when compared to the fees charged by Financial Advisors for ‘simple’ financial advice ($200 to $700).”

Broker commissions add 16bp per annum to the interest rate of every single mortgage customer, whether broker originated or not, the analysts claim. They note that commissions accounted for 23% of the costs in the major banks’ personal/consumer divisions in 2015. They do however note mortgage broker costs are not commonly disclosed by the banks.

The report warns that “we expect the banks to negotiate materially lower fee-for-service mortgage commissions in coming months”. They suggest that the advice for mortgages could be provided by robo-advice and the savings could be passed onto brokers “which could help offset anticipated repricing for the Bank Levy.”

Fiery response from the industry

“This report is garbage” responded FBAA executive director Peter White when asked for comment. White questioned the $4,600 figure used by UBS, saying the average commission was more like $2,500-$3,500 a deal. Whilst noting that banks did have the power to renegotiate commissions, White argued ASIC’s recent Review of Mortgage Broker Remuneration identified no reason for such a change.

Brokers should not be concerned by the report, according to White, who said that any changes to commissions would be at most ‘tweaking’.

MFAA CEO Mike Felton claimed UBS’ calculations had a fatal flaw: “Unfortunately, this report’s key finding is wrong. UBS has taken the 2015 upfront commissions plus the 2015 trail commissions (which includes commissions on all loans written by brokers in past years), and divided them by only the number of mortgages written in 2015. This has given them a commission per mortgage that is about double what it actually is in the year of acquisition.”

“We are extremely disappointed that a reputable organisation would issue a report like this without ensuring that the data they’re working with is correct.”

Felton also warned that UBS had misinterpreted the findings of ASIC’s review, which UBS took to show risks posed by brokers but the MFAA saw as showing no evidence of systematic harm caused by brokers.

Banks voting with their feet

Commissions are already under review by the banks, following the publication of the Sedgwick Review. Consequently, all major and several non-major banks have now committed to decoupling commissions from loan size by 2020. Sedgwick did not, however, recommend necessarily reducing commissions.

UBS’ report comes on the same day that HSBC revealed it is re-entering the broker channel in partnership with Aussie Home Loans, a move Aussie CEO James Symond claimed was “a vote of confidence in mortgage broking, considering the ASIC report, Sedgwick Report, bank levies.”

Symond added that “HSBC is such a prestigious, prominent, global player and for them to be jumping into the mortgage broking marketplace is not to be underestimated in terms of the confidence they have in the industry.”

UBS’ numbers

  • Total broker commissions in 2015: $2.4bn
  • 18% increase in broker commissions since FY2012
  • $4,623 – average commission per mortgage
  • 22.6% of banks’ personal consumer costs down to commissions
  • 16bp total cost of mortgage broker commission for every mortgage

ASIC’s Michael Saadat on the remuneration review

From Mortgage Professional Australia.

As brokers, lenders and consumers go head-to-head over ASIC’s remuneration review, the man behind it gives MPA editor Sam Richardson an insider’s view

ASIC launched its review of broker remuneration in November 2015, and since then brokers have talked about little else. It’s very possible you’ve at some point criticised ‘those bureaucrats at ASIC’; if so, Michael Saadat is your man. You won’t find Saadat’s name in the review, but ASIC’s senior executive leader played a huge role in its production, staying behind the scenes. Now, two years later, he’s finally free to talk about the review and how it could change your business.

What ASIC wants
Over two years ASIC collected 200 million data points from 1.4 million home loans, before boiling that data down to 243 pages. “It was a very time-consuming process,” Saadat recalls. “Not only did we look at the raw data and provide conclusions, but we also controlled the data for customer characteristics.”

In their quest to achieve an ‘apples for apples’ comparison of broker and non-broker customers, Saadat and his team broke down comparisons into, for instance, the difference in loan amounts taken out by low-income customers going to brokers and to banks.

Now ASIC is explaining its methodology and the data it has collected to the industry.

“We’ve had a few roundtable discussions with stakeholders; we’re planning on having more, and when we speak at industry events or conferences we will definitely be discussing the report and taking questions from people who are interested in hearing more about it,” Saadat says. At the time of writing he was confirmed to speak at the Annual Credit Law Conference in October.

These discussions will chiefly concern ASIC’s six proposals. Firstly, ASIC wants to change the standard commission model to take into account factors other than loan size (1). It also recommends moving away from bonus commissions (2) and soft-dollar benefits (3). ASIC believes there should be clearer disclosure of ownership structures (4) and proposes establishing a new public reporting regime on consumer outcomes and competition in the home loan market (5). Finally, ASIC wants to improve the oversight of brokers by lenders and aggregators (6).

Now that the review has moved into the consultation phase, Saadat is effectively powerless. Under Minister for Revenue and Financial Services Kelly O’Dwyer, the Treasury will be managing the process, in which industry associations, lenders, aggregators, consumer groups and individuals can have their say on the proposals before the end of June. Saadat, however, will not be taking part: “We wouldn’t put in a submission to our own report.”

On the sidelines
ASIC is now consigned to the role of spectator, left on the sidelines, observing the furore surrounding the separate Sedgwick review, which published its final report a few weeks after ASIC’s.

Stephen Sedgwick’s Australian Bankers Association-sponsored review ran concurrently with ASIC’s, but Saadat insists there was no collaboration between the two. “[ASIC] did not share any data with him that has not been made public by ASIC,” he says.

Nevertheless, in its final report ASIC did repeatedly refer to Sedgwick’s review and was condemned for doing so by the MFAA and FBAA.

ASIC was right to refer to the Sedgwick review, Saadat insists: “We know the Sedgwick review only covers the banks, and that’s why we said in our report that the banks need to work with the rest of the industry in responding to [ASIC’s] recommendations.”

When writing his report, Saadat had no idea what Sedgwick’s recommendations would be; in fact Sedgwick’s final report was published just 30 minutes before Saadat talked to MPA.

Sedgwick’s recommendations go much further than ASIC’s, urging banks to decouple commission from loan size. ASIC had recommended a change to the standard commission model to avoid incentivising brokers to write larger loans, while recommending that banks work with brokers to develop a response.

Instead the major banks, on the day Sedgwick published his recommendations, all agreed to implement them in full by 2020. This unilateral decision bypassed brokers, ASIC and the Treasury’s consultation process.

Despite this, Saadat says he is “pleased that industry is working to improve remuneration structures to create better outcomes for consumers, and improved trust in the sector”.

Acknowledging the review and the banks’ response, he “encourage[s] all industry stakeholders to provide feedback to Treasury as part of the current consultation process”. Commissions, in Saadat’s view, “are obviously commercial arrangements, and it’s up to both individual banks, aggregators and brokers businesses to work out what those commercial arrangements should be”.

Expanding ASIC
Regardless of whether Saadat or Sedgwick get their way, ASIC’s remit looks likely to expand. Sedgwick and the banks want ASIC to enact regulation to facilitate a move to a new commission structure, while ASIC will play a role in implementing whatever rule changes the government decides to introduce after June. wFurthermore, Saadat explains, “ASIC’s ability to intervene may also be bolstered by law reform proposals that are currently being considered by government, including those recommended by the Financial System Inquiry”.

Already Saadat has more immediate work on his plate: a shadow-shopping of brokers by consumers, which he will start planning by the end of 2017. “It is early days,” Saadat says. “We’re planning on commencing that work before the end of this calendar year, and are still working through the detail.” Shadow shopping will take place, Saadat confirms, regardless of the Treasury’s ongoing consultation process on the remuneration review, and “once it kicks off it’s going to be a pretty significant piece of work”.

ASIC’s work will not end with commissions. Instead Saadat and his team are faced with a Sisyphean task. The role of referrers was flagged by the review for further investigation, while consumer groups have demanded more oversight of cross-selling. And, says Saadat, the data that was published was just the tip of the iceberg.

For now it’s up to the industry to make changes, he says. “It was more about us trying to get the industry to respond without being forced by legislation to have change imposed upon them. We think the industry has an opportunity to respond and to take positive steps to make changes that will deliver wimproved consumer outcomes without necessarily needing the government to legislate for changes.”

Brokers Under The Microscope At Senate Standing Committee

From Australian Broker.

Lender-imposed conditions that brokers write a certain number of loans per month or year to retain accreditation need to go, said Peter White, executive director of the Finance Brokers Association of Australia (FBAA).

Speaking in front of the Senate Standing Committee on Economics in a government inquiry into consumer protection in the banking, insurance and financial sector on Wednesday (26 April), White said these restrictions – called minimum volume hurdles – were reducing a broker’s ability to write loans for whatever lender they desired.

“What that creates is a very bad consumer outcome because a broker can only give guidance on loans for lenders that they’re accredited to,” he said.

These restrictions mean that while a broker may be doing the right thing for the borrower with regards to the panel of accredited lenders they have access to, there may be another outside that scope which is more suitable.

“Unfortunately they can’t reach into that because they are constrained by the aggregator’s agreements and those accreditations. That’s generally restricted because they don’t have volumes to reach that lender,” he told the panel.

“Those sorts of things need to go.”

White also criticised elite broker clubs, saying he would outlaw them if he could. With brokers given access to better speed of applications, this was “unreasonable” and “completely unfair” to the borrower.

“You have an innocent borrower at the backend there. He’s sitting behind a broker who may only give a specific lender one deal every three months,” he said. “That gets penalised because they don’t have the volume. It’s got nothing to do with the borrower.”

When asked about soft dollar benefits, White said that these incentives needed to become more transparent although completely outlawing them may not be the best solution.

There was also nothing wrong with the current base model of commissions that brokers are paid today, he said, referring to the FBAA’s global research that found Australian brokers were paid below the global average. As for trail, this provided a number of positive consumer outcomes when it was introduced.

“With trail being brought into place, that was there to minimise the outcome of churn and also to provide a greater level of service to the borrower that wasn’t necessarily being provided by the banks.”

The FBAA’s research showed that taking away trail led to higher upfront commissions, a greater level of churn, and sales of additional products that may not be acceptable in the market.

Finally, White expressed his opposition to the fixed upfront commission recommended by consumer advocacy group CHOICE.

“The baseline of lending is very standard,” he said. “But it’s the knowledge and capabilities of what adds onto that to make it appropriate to that borrower’s specific needs or their lending structure. That becomes quite a significant skill set and it’s not the same.

“If you do a mum and dad home loan for example, that’s a very different transaction to doing development finance and working through feasibility studies and presales and all the research and due diligence that goes into that.”

Although these are generally higher loan sizes, the amount of work definitely increased as well, he said.

Separately, ASIC said Improved tracking of broker data is required

Difficulties by lenders to compile clear, robust data on brokers has prompted the Australian Securities & Investments Commission (ASIC) to call for improved systems that allow banks and non-banks to track and report on broker activity.

Speaking in front of a Senate Standing Committee on Economics in a government inquiry into consumer protection in the banking, insurance and financial sector on Wednesday (26 April), ASIC deputy chair Peter Kell said that collecting data for the regulator’s recent Review of Mortgage Broker Remuneration was a challenge.

The main difficulty was that some lenders could not track simple issues such as the loans that were originated from and the amount of remuneration paid to each individual broker. Certain lenders also had no way to track the soft dollar benefits offered.

“One of the recommendations we have made is that this information should be provided through a new public reporting regime of consumer outcomes,” Kell said. “[This will] require lenders to set up systems to allow them to track this [and] also provide some transparency in the market.”

Kell emphasised that these gaps in information were not as a result of any unwillingness by the lenders to provide data. However, “it was apparent that the systems that some of the lenders had in place were not as robust and didn’t give them as clear a picture as I think they themselves would wish,” he told the committee.

The exercise was a “wakeup call” for some of the lenders, he said.

ASIC recommended a public reporting regime to eliminate current issues with the non-consistent structures between lenders with different systems, metrics and numbers.

“Having a public reporting regime is a good discipline to ensure that this data will be collected going forward,” Kell said.

However, the challenge for ASIC now is determining how to compile the collated information in a manner that both the industry and the public can see.

Major bank reveals lack of ‘clarity’ around aggregator oversight

From The Adviser.

A big four bank has acknowledged that data quality and public reporting could be further improved in the mortgage industry, revealing it ‘does not have clarity’ around some aggregator data.

Speaking last week at the final leg of the second series of the Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — NAB general manager for broker distribution Steve Kane touched on Finding 13 of the report, which notes that the regulator encountered “significant issues with the availability and quality of key data” from some participants.

According to the remuneration report, the lack of some data requested “affected [ASIC’s] ability to analyse the data for some of [its] core review objectives [and] raises concerns with the participants’ ability to monitor consumer outcomes in relation to their businesses”.

Some of the examples of the lack of data included an inability by a lender to “automatically track whether a particular loan was arranged by a particular individual broker or broker business”, which “increases the risk that lenders may be dealing with unlicensed persons” and “means that lenders have little visibility of patterns of poor loan performance connected to these individuals or businesses”.

At the NAB event, Mr Kane acknowledged that there was further work to be done in this area.

He said: “This is an interesting one. As a lender, we have lots of information on individual brokers and the loans they submit and we have lot of information about aggregators and their total portfolio… but we don’t have, for example, lots of information about any individual firms that operate (with many brokers under them) under that particular aggregator. That is just one example. So, we don’t have clarity around that.”

Mr Kane added that it is therefore “fair to say that the aggregators will be working much more closely with lenders around data” in the future.

The general manager for broker distribution went on to say that, through Proposal 6*, it was “clear that ASIC expected brokers to obviously adhere to NCCP, responsible lending and compliance issues around maintaining a licence, having your own ACL or being accredited under someone else’s’ ACL… [and that] the aggregators need to understand that brokers are actually compliant with all of those things… [and] actually be able to provide evidence of that and good consumer outcomes too”.

He added: “And they’re saying that the lenders need to do that as well…[they] need to ensure the aggregators have the proper information, proper record keeping, and proper understanding of the roles and responsibilities in relation to the legislation and good consumer outcomes.”

Public reporting regime

As well as improving oversight of brokers and broker businesses, ASIC has also proposed to Treasury that there be a new public reporting regime to “improve transparency in the mortgage broking market” (Proposal 5).

Specifically, this proposes that there be public reporting on:

(a) the actual value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied;

(b) the average pricing of home loans that brokers obtain on behalf of consumers;

(c) the average pricing of home loans provided by lenders according to each distribution channel; and

(d) the distribution of loans by brokers between lenders to give consumers a better indication of the range of loans that brokers within the network offer.

Touching on this proposal, Mr Kane said that one such solution could be that brokers give their customers “information that says ‘I’ve settled 50 deals this year, I’ve used this number of banks, I’ve obtained this amount of finance and this has been the price on average I’ve achieved for the customer’. It could get down to this level, which is very important in terms of disclosure to the customers,” he said.

“This all goes to the governance of oversight perspective, which is really now starting to say: ‘Do we, as an industry, have a clear understanding of all of the consumer outcomes that brokers are providing to their customer? Do we have proper understanding of whether NCCP responsible lending is met at every instance for the customer? Do we have a robust process to identify when a broker has done wrong thing and therefore the accreditation has been removed from lenders and aggregators? Do we have a clear line of sight and understand what the process is for those people? Do we have a much stronger regime in relation to a register of all of these ‘bad apples’ and how do we go about doing that? How do we go about ensuring that the end consumers know that they are not to be dealing with those people?’”

Mr Kane concluded: “When it comes to governance and oversight, it really is about accountabilities and responsibilities and understanding that disclosure to the customer about all the facilities that are available to them.

“So,” he said, “you can see that there is going to be far more reporting available to the public around these things.”

“Governance and oversight will play a much bigger role and therefore there will be much more work an information sharing and much more collation of performance and outcomes for consumers.”

The Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — also revealed that the big four bank believes that Australian brokers could achieve up to 73 per cent market share if reaction to the ASIC remuneration review is “right”.

NAB’s executive general manager for broker partnerships, Anthony Waldron, told brokers that the industry reaction to the current consultation on the ASIC report could further boost the third-party share of the market by improving trust.

Mr Waldron said that there is an “opportunity” if “industry can react and get this right”.

He explained: “It’s the opportunity for more people to understand what brokers do, it’s the opportunity to build trust even further in what you do. And if we can do that then we won’t be talking about 53 or 54 per cent of mortgages going through the broker community, we will be talking about more like the numbers in the UK where it is already in the 72 or 73 per cent.”

*Proposal 6 of ASIC’s Review of broker remuneration states that the regulator expects lenders and aggregators to improve their oversight of brokers and broker businesses, for example by using a consistent process to identify each broker and broker business (such as the use of the Australian credit licensee or credit representative number where relevant, or a unique number provided by the aggregator).