We look at the latest ASIC report on Mortgage Brokers, and the exposure draft of the Best Interest Obligations due to come in next year.
What questions should you be asking your Mortgage Broker?
Tag: Mortgage Broker
Mortgage Broker Best Interest Draft Bill Released
The Treasure has released an exposure draft of the proposed Mortgage broker best interests duty and remuneration reforms.
The National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019 — containing a new bests interest duty obligation on mortgage brokers, as recommended by Commissioner Kenneth Hayne in the final report of the banking royal commission. Via The Adviser.
The bill states that brokers “must act in the best interests of consumers when giving credit assistance in relation to credit contracts”, meaning:
- where there is a conflict of interest, mortgage brokers must give priority to consumers in providing credit assistance in relation to credit contracts,
- mortgage brokers and mortgage intermediaries must not accept conflicted remuneration — any benefit, whether monetary or non-monetary that could reasonably be expected to influence the credit assistance provided or could be reasonably expected to influence whether or how the licensee or representative acts as an intermediary.
- employers, credit providers and mortgage intermediaries must not give conflicted remuneration to mortgage brokers or mortgage intermediaries.
The draft bill, which is open for consultation until 4 October, notes that the duty to act in the best interests of the consumer in relation to credit assistance is a “principle-based standard of conduct” and “does not prescribe conduct that will be taken to satisfy the duty in specific circumstances”.
“It is the responsibility of mortgage brokers to ensure that their conduct meets the standard of ‘acting in the best interests of consumers’ in the relevant circumstances,” the bill states.
According to the bill, the content of the duty “ultimately depends on the circumstances in which credit assistance is provided”.
Examples of such content cited in the draft bill include:
- prior to the recommendation of a credit product, it could be expected that the mortgage broker consider a range of such products (including the features of those products) and inform the consumer of that range and the options it contain,
- any recommendations made could be expected to be based on consumer benefits, rather than benefits that may be realised by the broker (such as commissions);
- in cases where critical information is not obtained when inquiring about a consumer’s circumstances, the broker could be expected to refrain from making a recommendation about a loan where there is a consequent risk that the loan will not be in the consumer’s best interests;
- a broker would not suggest a white-label home loan that has the same features as a branded product from the same lender, but with a higher interest rate, because it would not be in the best interests of the consumer to pay more for an otherwise similar product; and
- during an annual review, a broker would not suggest that the consumer remain in a credit contract without considering whether this would be in the consumer’s best interests.
In addition to the new best interests obligation, the draft bill requires a mortgage broker to “resolve conflicts of interests in the consumer’s favour”.
The bill states that “if the mortgage broker knows, or reasonably ought to know”, that there is a conflict between the interests of the consumer and the interests of the broker or a related party, the mortgage broker “must give priority to the consumer’s interests”.
As an extension to the best interests duty, the bill builds on remuneration reforms proposed by the Combined Industry Forum, which includes:
- requiring the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount;
- banning campaign and volume-based commissions and payments; and capping soft dollar benefits.
The proposed regulations also limit the period over which commissions can be clawed back from aggregators and mortgage brokers to two years and prohibit the cost of clawbacks being passed on to consumers.
The new provisions are scheduled for implementation by 1 July 2020.
Bank requirement leaves brokers “entirely exposed”
A professional indemnity (PI) specialist has expressed grave concern over new requirements for brokers to confirm that there are no signs of financial abuse when they assist clients in securing a loan; via Australian Broker.
The action has been taken by the banks in response to the Australian Banking Association’s updated code of practice requiring a higher standard for dealing with vulnerable customers. However, Darren Loades, the FBAA’s dedicated PI insurance specialist for Queensland and the Northern Territory, has questioned the sudden announcement, the lack of clarity as to what the agreement entails, and the days-long timeframe before the 1 July implementation.
“Do you think that’s by accident? I sure don’t,” said Loades.
“The main point is that it’s been rushed through, no one has actually seen the details, and it could have very far-reaching and onerous implications for brokers. Do not sign anything for the moment.”
Loades highlighted the serious liability concerns of signing an agreement that could likely take brokers out of their current coverage and leave them “entirely exposed.”
“Professional indemnity policies only respond to claims made under common law. Signing one of these declarations could incur contractual liabilities, over and above the liabilities a broker would owe at common law,” he explained.
“The standard PI policy out there on the market will not pick up any liabilities owed under contract. Brokers could potentially be left exposed and not insured at all.”
Last week, FBAA managing director Peter White expressed concern that “PI insurance could increase tenfold to cover a declaration like this.”
“To try and ram this through with little notice is not only ridiculous and ill-conceived, but creates massive risks for brokers with almost no benefit to borrowers,” he added.
As White expressed last week, Loades finds it suspect that the agreements the banks are asking brokers to sign have yet to be made accessible.
He continued, “But knowing the banking industry, the documents are going to be pretty far-reaching with some nasty little clauses in there along the lines of, ‘If you drop the ball in this area, you agree to indemnify the bank against any losses.’ Otherwise, why would they be going to this trouble?
“This seems to be a push from the banks to transfer their liability onto the broker, which isn’t all that fair or realistic.”
While Loades does acknowledge that brokers are the ones to have face-to-face interaction with the borrower, he has serious doubts that a set of written guidelines provided by the bank could translate to brokers being able to identify signs of abuse in real life stations.
“That’s a whole different ballgame. Brokers aren’t qualified or licenced to provide advice in this area of financial abuse,” he said.
“What happens if the broker happens to innocently miss a situation where there is financial abuse? The bank is going to rely on this document to say, ‘Well, you signed off. You’re the one who is liable.’”
Brokers On The Boil?
Broking groups have reported a spike in borrower enquiries following the Reserve Bank’s decision to slash the cash rate to a new record low, via The Adviser.
On Tuesday, the Reserve Bank of Australia (RBA) cut the official cash rate for the first time in almost three years, dropping the cash rate by 25bnps to 1.25 per cent.
Several lenders, including the big four banks, have passed on the rate cut partly or in full to mortgage customers, which according to broking franchise groups Mortgage Choice and Loan Market, has triggered an “influx” of borrower enquiries.
Andrea McNaughton, Loan Market’s executive director of growth, told The Adviser that the broking group received an overwhelming response from clients after informing them of changes in the interest rate environment via a marketing campaign.
“I think it’s been an exciting few weeks, a lot more confidence has returned to the market and I think the trifecta was Tuesday, with the announcement of a cut,” Ms McNaughton said.
“We’ve sent out a text message and an email campaign to our client base, simply saying, ‘great news about the interest rate reduction this week, let’s chat so we can tell you what this means for our loan and how simple our process is to review – message me back and let’s get the ball rolling’.
“We had about 12 response to that in 20 minutes to see brokers.”
Mortgage Choice CEO Susan Mitchell also reported a sharp uptick in borrower enquiries, from both refinancers and those looking to secure a new loan.
“A number of brokers received calls from their existing customers, who had heard news from the media and their family and friends about low interest rates, with many new enquiries originating from referrals,” she told The Adviser.
“Brokers have said a number of customers had called asking if they can get a rate below 4 per cent, particularly investors who had been holding back on their property buying plans.
“Interestingly, some brokers have reported an increase in enquiries from customers wanting to exit a fixed-term and while it isn’t always economically feasible, there are lenders offering competitive deals.”
Ms Mitchell said that the spike in enquires has also been evident among first home buyers (FHBs) that were previously hesitant to enter the property market amid uncertainties.
“Brokers have also reported an increase in enquiries from first home buyers who feel more confident about taking their first steps towards home ownership,” Ms Mitchell said.
“Some have attributed this sentiment to a change in the political climate, others put it down to the news around lower interest rates and falling property values.”
The rise in borrower enquiries following the RBA’s monetary policy adjustment was also reflected in an analysis from comparison website Finder.com.au, which reported an unprecedented 654 per cent increase in traffic to home loan deals within 48 hours.
According to Finder, interest in variable rates grew by 564 per cent, while refinancing enquiries spiked by 369 per cent.
However, despite the uptick in enquiries following widespread cuts to mortgage rates, tighter lending conditions have inhibited borrowers from easing their mortgage burden, at least according to new research from S&P Global Ratings.
Ms McNaughton acknowledged the challenges, but said she expects the Australian Prudential Regulation Authority’s (APRA) proposed changes to home loan serviceability guidelines to improve access to credit.
“I think we’re all hoping that that will ease a bit now [that] APRA has made that decision,” the Loan Market executive said.
In the meantime, Mortgage Choice CEO Susan Mitchell encouraged brokers to capitalise on the growing demand for finance.
“As sentiment turns, brokers should take the opportunity to reach out to those in their database who have made an enquiry in the last few months,” she said. “Check in with them, find out where they are on their property buying journey and remind them that you are here to guide them.”
She continued: “Similarly, it is paramount you communicate with your existing client base and ensure their needs are still being met. Invite them to do a home loan review to ensure they are getting a competitive deal and ask them if their loan is still meeting their needs.
“This will be particularly important to those customers whose lender has not passed the rate cut on in full.”
Ms Mitchell also urged brokers to use the opportunity to promote their brand to strengthen their client base.
“For brokers out there, who do not have a database, take advantage of the positive sentiment in the market. Increase your local marketing efforts, boost your profile – even if it means hitting the pavement, shaking hands in your local area and introducing yourself as the local home loan expert,” Ms Mitchell concluded
Best interest duty “an impossible standard”
The royal commission’s recommendation that brokers work under a best interest duty has been called “an impossible standard” by an association CEO and former regulator who saw Canada try and fail to do the same, via Australian Broker.
In 2016, Canada’s regulatory body the Canadian Securities Administrators (CSA) announced it would introduce a best interest standard after a four-year investigation exploring how the requirement would alter the market.
Within two years, each of the country’s regional regulators had scrapped the duty having failed to define “best” or sufficiently demonstrate how the value judgment could be enforced.
“When you’re talking about the ‘best’, it’s just an impossible standard. How are you supposed to nail down all the options?,” said Samantha Gale, CEO of the Canadian Mortgage Brokers Association in British Columbia.
“When push came to shove, when the principle was explored in terms of application, everybody had a hard time trying to figure out what it meant and what it would require. It sounds good, it sounds like the right thing to do, but it wasn’t quite clear what it meant.
“It’s an unreachable, unsurpassable, unattainable standard,” she told Australian Broker.
Several articles that circulated after the duty was discarded pitted the interests of financial advisers as conflicting with those of the consumer.
To Gale, this is not a fair representation. She explained, “The two aren’t necessarily opposed to each other. Looking after yourself in a professional capacity means that you need to be compensated. Looking after your client means they need to be the recipient of your professional services. Hopefully, you’re both satisfied.”
On the spectrum of possible regulatory models, Gale places rule-based regulations on one end and principle-based regulations on the other. The proposed best interest duty falls in the latter group.
“With rule-based regulations, there’s complete clarity. The law says, ‘You must do a, b, c.’ But principle-based regulations say, ‘we have these lovely standards and you must abide by these lovely standards, so figure out a plan to do that’,” she said.
In Gale’s experience, regulators typically shy away from providing clarity due to liability concerns, despite the fact that regulated professionals require and tend to even explicitly request, clear rules. It is a contractual business relationship between lawyer and client, with both parties understanding the terms of the arrangement.
“Regulators are good at coming up with standards, but they’re short on applying that to practical circumstances so the industry is left to wonder, ‘what does this mean and how does it apply?’ That’s the challenge of it,” Gale said.
When it comes to the future of the duty in Australia, Gale foresees the need for “balanced rules that provide for standards, but that also provide clarity.”
“Without that it’s like you’re trying to connect dots, trying to figure out what the right answer is, but the regulators are moving the goalposts along the way,” she concluded.
What Does The Hayne Report Mean To Mortgage Brokers And Financial Advisers?
I discuss the report with Chris Bates, mortgage broker and financial planner – he is not impressed!
Chris can be found at www.wealthful.com.au & www.theelephantintheroom.com.au plus via LinkedIn: https://www.linkedin.com/in/christopherbates
Broker Commission Stoush Continues
The Mortgage & Finance Association of Australia (MFAA) has responded to the comments made by Commonwealth Bank of Australia (CBA) CEO Matt Comyn during yesterday’s Royal Commission hearings.
During the hearing, Comyn expressed his preference to scrap broker commissions and implement a fee for service. The MFAA has said it clearly demonstrates that CBA’s priority is shareholder returns.
MFAA CEO Mike Felton said the CBA’s position was not surprising, but was “entirely selfserving”, in that it is designed to destroy competition and reduce the bank’s reliance on the broker channel.
He said, “CBA’s model is anti-competitive and designed to drive consumers back into their branch network, which is the largest branch network of the major lenders.
“Mr Comyn’s solution for better customer outcomes is a new fee of several thousand dollars to be paid by consumers to CBA for the privilege of becoming a CBA customer.
“Cutting what brokers earn by two-thirds would save CBA $197 million, which is good for CBA’s shareholders. However, it would destroy competition, leaving millions of customers without access to credit outside of major lenders.
“In addition, as has been highlighted by both the Productivity Commission and Treasury, consumers are simply not willing to pay significant up-front fees for access to a home loan.”
Felton has also addressed Comyn’s recommendation to follow a model adopted in the Netherlands, under which consumers pay the same fee whether they use a broker or a branch, to ensure channel parity.
He said, “The proposal to adopt the Netherlands strategy is designed to maximise lender revenue. Under this model, broker customers pay the broker’s costs – instead of the bank – or branch customers pay a new fee that will substantially add to the bank’s revenue line and add thousands of dollars to the cost of getting a home loan from a lender directly.
“This is a fantastic win-win for CBA but a massive lose-lose for consumers regardless of whether or not they use a mortgage broker. CBA either acquires a new customer with zero acquisition cost, or it receives a new fee and massively decreased competition, so it can return to the days of four lenders in Australia. It’s a great deal for the bank.
“Any suggestion that this profit will be passed back to customers in the form of lower interest rates is fanciful.”
Felton also questioned the idea that brokers should earn the same as an in-house branch lender, whose overheads are paid by the bank.
He said, “Brokers are small business owners. They are not employees offering one product to customers. They pay rent, and staff, and electricity bills. They have to find every dollar they earn through servicing customers well and developing a strong reputation and referral network.”
The MFAA challenged the statements by CBA that brokers are causing systemic issues in the home lending market – and that it should be a lender who is tasked with ensuring good consumer outcomes for the entire Australian home lending market.
He said, “ASIC’s extensive, data-driven review of mortgage broker remuneration concluded that there was no finding of systemic harm caused by the broker channel,” Mr Felton said. “Additionally, as noted by Treasury in its background paper to the Royal Commission in July 2018: ‘Following a comprehensive report by ASIC in 2017 on mortgage broker remuneration, the industry is progressing reforms that could address the most significant misconduct with the current remuneration model’.”
“Frankly, we were surprised that it is being suggested that one of the major lenders should be tasked with reforming Australia’s home lending market, given the revelations of the past 12 months.
“The Productivity Commission found that: ‘Fixed fees paid by customers rather than commission structures have been proposed, and would eliminate conflicts, but the cost to competition would be high. Consumers would desert brokers, and smaller lenders (and regional communities with few or no bank branches) would suffer much more than larger lenders, if customers were required to pay for broker advice’.”
CBA Had Suggested Broker Fee For Service
Commonwealth Bank’s CEO Matt Comyn spent yesterday (19 November) in front of counsel assisting Rowena Orr QC, discussing many of the issues which came about in commissioner Kenneth Hayne’s interim report, via Australian Broker.
During the hearing Comyn said he supported a flat fee for service remuneration model for brokers and regulation change over trail commission.
He also said he had been in talks as far back as April 2017 considering making the change for CBA, but in the week before feared a “first mover disadvantage” if no one else made the same move.
Comyn was quizzed on research he had put forward to both the Sedgewick review and ASIC’s review into broker remuneration and said that brokers were “sensitive to where the commission structure is set”.
This was due to the findings of one report which suggested that broker flows to lenders increased with higher broker commissions. According to this evidence, one lender gained a 5.9% market share when they offered a limited time commission increase and then lost 5.1% when it stopped.
Orr went on to ask Comyn about emails sent to former CEO Ian Narev, where Comyn had suggested a fee for service model as seen in the Netherlands.
He said it would work the same in Australia, where to level the playing field and “preserve” mortgage brokers, banks would also need to offer a fee to customers for the execution of a mortgage.
He said, “I think it would put a material disadvantage to the brokers if customers paid a broker but they didn’t have to pay a similar amount to a financial institution. I think that would create a distortion.”
Comyn said CBA had been looking at moving to a flat fee model back in April 2017, but was concerned other institutions would not follow.
He said, “We were struggling or grappling with how to implement, and I’m sure we will return to it, we felt there was a genuine first mover disadvantage.
“We didn’t think it would be replicated, absent regulatory intervention. Therefore, we didn’t think we would improve customer outcomes because, effectively, no one else would change their model. We would just originate fewer loans through that channel.”
Confirming Comyn’s stance on the broker remuneration model Orr said, “So you would like to change to a flat fee model?”
Comyn said, “I can certainly see advantages in that model, yes. I would add that that view would not be supported by other participants in the industry but my personal…”
Interrupting, Orr said, “I am asking you about your view, Mr Comyn?”
Comyn replied, “Yes, that is my view.”
Orr said, “You would prefer to move to that sort of model?”
To which Comyn said, “Yes, I would.”
Looking specifically at trail commission, Orr asked Comyn about the services brokers continue to provide after the loan is complete if that was the argument for trail.
Commissioner Hayen interjected and asked if there were any ongoing services supplied by a mortgage broker.
Comyn replied, “I think they would be limited, Commissioner.”
When asked if that meant “limited or none”, Comyn said, “Much closer to none”.
When Orr asked Comyn if he thought trail commissions needed regulatory change, he said “Yes”.
The emails to Narev also discussed how much revenue the broker would lose on an average loan. The broker revenue on an average loan at the time of the email written was $6627 and would be expected to reduce to $2310, in line with the “acceptable band for the price of financial advice”.
Broker groups’ misconduct revealed
The latest batches of documents released by the Royal Commission into Financial Services Misconduct included a litany of poor or illegal behaviour across the broker groups. This included detailed incidents of falsifying documents and fraud, plus sexual harassment, offensive behaviour and homophobia based on 215 newly released documents from 94 groups. We can conclude this is way more than “just a few bad apples”.
This via Australian Broker.
While most, if not all, broker groups detailed incidents of falsifying documents and fraud, it has been revealed some of the behaviour at Aussie Home Loans included sexual harassment, offensive behaviour and homophobia.
The group has said it will continue to support reporting of such unacceptable behaviour as it to enforces a zero-tolerance policy.
When the Royal Commission into banking misconduct was first established, Commissioner Kenneth Hayne asked financial entities to provide information on misconduct or conduct falling below community standards over the last ten years.
While the incidents listed in the reports were to be the basis for many of the hearings during the Royal Commission, these 215 newly released documents from 94 groups paint a much broader picture.
Looking exclusively at submissions from broker groups, misconduct was listed alongside any action taken and subsequent outcome.
AFG submitted 12 items detailing incidents, which included brokers providing false documents, making administrative errors, breaching the privacy of clients, failing to comply with NCCP obligations and creating false approval letters.
Loan Market also made a submission which detailed 33 incidents of misconduct. Incidents included creating false documents, tampering with documentation, inappropriate use of social media, overstated consumer income and copying and pasting signatures.
Mortgage Choice has listed ten incidents including more than one case of falsifying signatures, providing false loan approval letters, misstating customer financial positions and falsifying documents. The broker group also listed three cases of failing to produce a Statement of Advice to customers.
Smartline listed incidents of altered valuation reports, failure to make reasonable enquiries about a customer’s financial circumstances and inaccurate information on loan applications.
The mortgage group also included an incident where a borrower’s credit card was allegedly fraudulently obtained and used, which at the time of submission was subject to a NSW police investigation.
It also detailed an “isolated incident” relating to theft from a customer and ended with the broker’s licence being revoked and the sale of their franchise.
Yellow Brick Road’s submission also included details of fraud and false documents. In one case a Vow Financial broker was accused of fraudulently gaining access to customer bank accounts and transferring funds.
Commonwealth Bank’s submission included details of behaviour at Aussie Home Loans. It includes details of “offensive or otherwise unprofessional behaviour” directed at employees and/or brokers.
Out of 182 total incidents, there were 29 listed as misconduct relating to false documents and/or declarations and/or misleading information.
There were 19 incidents listed in relation to NCCP breaches, including lack of reasonable care, failing to make the right enquiries and encouraging customers not to disclose the purpose of the loan.
The remaining incidents included, but were not limited, to:
- Sexual harassment at a work event, and sexual harassment outside of work
- Using Aussie’s IT system to send “emails containing objection material which could cause offense to a reasonable adult”
- Accessing customer’s personal details
- Numerous counts of unprofessional language and tone
- Pretending to be the customer
- Mutiple examples of ex-brokers using confidential information to contact former customers
- Disclosing customer details to other parties
- “Unprofessional conduct by making veiled threats to customer’s solicitor and allegedly impersonated someone else”
- Customers experiencing homophobia
- Derogatory and discriminatory comments
- Alleged abuse of female in car park by a retail store broker and issue disclosed on Facebook
- Attending a licenced venue “on a regular basis” and returning to work visibly drunk
- Gaining access to an Aussie office after a work event, theft and assault
- Inappropriate sexual language with fellow employee
- Bullying by senior executives
A spokesperson from Aussie Home Loans said, “Media reports of submissions to the Royal Commission cited isolated incidents of unacceptable conduct involving staff and contractors over a ten year period.
“Aussie provided the Royal Commission a detailed and exhaustive table of incidents as a result of building a culture of actively encouraging and facilitating staff, contractors and customers to speak up and report unacceptable conduct.
“In each and every case of unacceptable conduct, Aussie took appropriate and swift disciplinary action, which included termination of employment and contractor agreements.
“Aussie will continue to actively encourage reporting of unacceptable conduct, to enforce its zero-tolerance policy for such conduct and to enhance its systems and process to prevent, detect and deter such conduct.”
HBSC To Partner With REA Group’s Smartline.
HSBC Australia has confirmed its third broker partnership with REA Group’s Smartline.
HSBC’s products will be available from this month, including Home Value which is available at 3.64% p.a. (comparison rate 3.66% p.a.*) for owner occupied loans paying principal and interest.
In addition, qualifying Smartline customers will have access to HSBC Premier, the bank’s premium banking and wealth management service.
HSBC Australia returned to the broking space with Aussie Home Loans in 2017 and announced its second broker partnership with Mortgage Choice, in January of this year.
Speaking to Australian Broker, Alice Del Vecchio, the bank’s head of mortgages and third party distribution, said, “We hand-picked Smartline because they are a great fit for us.
“They are an extremely compliant business and they work to the highest global standards, but beyond that they also have a really good franchise model. The teams there are long term and the average tenure is 10 to 12 years, so you have some really long term, established brokers who know the market and know their stuff. They really appreciate having the opportunity to bring a brand like ours on board and the value and opportunity it can bring,” she continued.
Smartline has arranged mortgages for more than 275,000 home owners and has a nationwide network of 400 brokers. HSBC joins more than 30 lenders on the aggregator’s panel.
Sam Boer, CEO of Smartline said, “HSBC is a well-recognised global brand with a comprehensive range of home loans that will help us meet the needs of our customers. We take pride in the longevity of our customer relationships and the strength of our customer service, and we believe this partnership is a great fit.”