Tag: Mortgage Broker

CIF to propose ‘customer first duty’ for brokers

The Combined Industry Forum has agreed “in principle” to extend its good consumer outcomes requirement to incorporate a “conflicts priority rule” as a “customer first duty”, via The Adviser.

In its interim report, released on Monday (27 August), the Combined Industry Forum (CIF) stated that throughout 2018, it has been considering ways to build upon its good customer outcomes reforms published in its response to the Australian Securities and Investments Commission’s (ASIC) review into mortgage broker remuneration.

In its review, ASIC noted that a broker would satisfy the requirement if the “customer has obtained a loan which is appropriate [in terms of size and structure], is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”

However, the CIF has proposed that the provision could be extended to include a “conflicts priority rule”.

“The ‘conflict priority rule’ could be formulated as a requirement for the customer’s interests to be placed above the providers, or those of their organisation, based on the information reasonably known to the provider, at the time of providing the service,” the CIF noted.

“The effect of this approach would be a requirement to place the customer’s interests first. The combination of the good customer outcome definition and a customer first duty allows both an easy to follow principle – put the customer’s interests first – and structure to follow for brokers when assessing loan suitability.”

The CIF added that further governance metrics could be built for “monitoring and oversight”.

However, the CIF acknowledged that the development and application of the customer first duty is “multifaceted and complex”, noting that “there may be unknown impacts”.

“These include the potential for limiting access to credit, and a disproportionate impact on smaller and regional lenders if lender panels require rationalisation,” the CIF continued.

The CIF noted that it had “not yet settled on a final position”, but claimed that the reform should be underpinned by the following principles:

  • placing the customer first, and having ‘good’ consumer outcomes at the centre of its approach
  • fit-for-purpose for the mortgage broking industry, considering the nature of services provided, the form of conflicts of interests inherent to the industry, the current evidence of risks to customer outcomes, and considering the current regulatory framework
  • promoting competition, and ensuring that no part of the value chain is unfairly disadvantaged
  • all parts of the value chain will have a role to play to support the implementation and monitoring the customer duty
  • providing transparency for all participants, and
  • promoting simple, achievable solutions. Finally, the CIF is aware that there is merit in moving a customer first principle from an implicit expectation, to an explicit statement that a customer and mortgage advice provider can easily understand.

The CIF concluded that it is “aware that there is merit in moving a customer first principle from an implicit expectation, to an explicit statement that a customer and mortgage advice provider can easily understand”.

The report also outlined CIF’s progress in implementing other reforms proposed in its response to ASIC, which include the standardisation of commission payments, the removal of bonus commissions, the removal of “soft dollar payments”, and the drafting of the “Mortgage Broking Industry Code”.

No more volume-based bonuses for mortgage brokers

The ABA says that Australia’s mortgage broking industry has ended the use of volume-based bonus commissions, campaign-based commissions, and other volume-based bonus payments. This is one of the main findings of an interim report prepared by the Combined Industry Forum.

In making these changes, the industry has responded to concerns that the previous structure of incentives risked customers being encouraged to borrow more than they need.

The move follows findings of ASIC’s Review of Mortgage Broker Remuneration and the Australian Banking Association’s Sedgwick Review which identified there was a risk with volume-based incentives.

Volume-based incentives in residential mortgage lending were also identified during the Royal Commission as not meeting community standards and not delivering the best results for customers.

The Combined Industry Forum has been working with the industry since May 2017 to facilitate progress of the adoption of ASIC’s recommendations.

“The work of the Combined Industry Forum shows how the industry is committed to reform and to raise the bar in support of good customer outcomes,” Chair of the Forum, Anthony Waldron, said.

“Mortgage brokers enable greater access and affordability for all consumers to lending, and these changes are a positive step towards setting new standards and shaping the future of the broking industry.”

CEO of the Australian Banking Association, Anna Bligh, said the interim report outlined important changes which would help refocus the industry on producing strong outcomes for its customers.

“The ASIC Review, the Sedgwick Review, the Productivity Commission and the Royal Commission have all shown us that the industry has a problem with these types of payments that may encourage customers to borrow more than they need,” Ms Bligh said.

“These types of payments present a risk that brokers will place customers with lenders for the wrong reasons.

“By addressing these types of incentives, the industry has acknowledged their failings and taken responsibility to fix the problems to ensure Australian customers are receiving high quality advice,” she said.

Mortgage and Finance Association of Australia CEO, Mike Felton, said he was pleased with the progress made by the industry as outlined in the interim report, noting that the industry has taken decisive action on this key issue and other recommendations raised by ASIC and the Sedgwick review.

“I am particularly pleased with the progress made this year. This move gives consumers continued confidence that recommendations from brokers are not biased towards a particular lender,” Mr Felton said.

“The abolishment of volume-based bonus commissions by members is a significant milestone for the industry. I look forward to continuing our work with industry and consumer groups as we implement additional reforms in response to ASIC’s Report,” he said.

Finance Brokers Association of Australia Limited (FBAA) Executive Director Peter White said the change was a fantastic outcome.

“Moving away from campaign based incentives and other volume-based bonus payments is an important step in addressing community concerns about remuneration practices in the mortgage broking industry,” Mr White said.

“Scrapping these bonuses that encouraged a focus on sales is an important step for the industry and demonstrates its commitment to change while also maintaining healthy competition.

“Each member of the Combined Industry Forum is committed to driving change and to ultimately rebuilding trust with our customers,” he said.

The industry has begun overhauling agreements between providers and brokers to remove discount or ‘free aggregation’ for specific loans. This will substantially reduce incentives for brokers to sell loans from one particular provider. This work will be completed by the end of the year.

These changes are part of a package of reforms recommended by the Forum at the end of last year, which includes further changes to the standard commission model, a new regime for controlling and disclosing non-monetary benefits, and improved public reporting and disclosure requirements.

As part of the commitment made by the Forum, Treasury and ASIC have been briefed on the interim report.

Broker group established to respond to regulators

From the Sedgewick report, to the Productivity Commission and ASIC’s investigations, brokers – particularly their remuneration – have been under fire from all corners; via Australian Broker.

Now, a cohort of industry execs have come together to help the industry unite through a dedicated forum.

The Mortgage Industry Forum (MIF), is backed by 16 founding members from Yellow Brick Road, Foster Finance, Mortgage Success, Shore Financial, ALIC, Intelligent Finance and Loan Market, among others.

Revealing the details during a National Finance Broker Day event in Sydney, YBR executive chairman Mark Bouris said, “This is important. It’s about time we reacted and there is something happening, that I’m involved in, and I would be happy for you to join us.”

Reiterating that MIF is “not against ASIC” or intending to become a competitor to the MFAA or FBAA, the group is intended to be “adjunctive to the Combined Industry Forum”.

Bouris continued, “The objective is to assess all the recommendations that are being made about us as an industry

“I paid for it, we meet every week or two and we cull through every recommendation that has been made by the CIF, Sedgewick, every recommendation from the Productivity Commission, ASIC and anybody else who matters,” he added.

MIF has written and submitted its own report to Treasury and the royal commission, which contains industry observations and recommendations from the broker perspective, with a heavy focus on protecting trail commissions.

Bouris explained, “We are trying to build a case for brokers so we, as a segment of the market can hand over …. a document to show how we should be regulated or managed around fee structures, our obligations, our transparency, training and compliance for the future. “

Next, a survey of broker input on the six CIF recommendations – available for all brokers to contribute towards through MIF’s Facebook page – will also be taken to key decision makers.

“We need to take to the government a document that will say, of the 17,000 brokers in this country, this many support all the recommendations. Otherwise all we have is people speaking for us, on our behalf, and that doesn’t work,” Bouris continued.

In addition to gauging sentiment, the group will also make practical suggestions as to how brokers can demonstrate the ongoing work they do in return for trail commission. Further, the group will also suggest new tools to support compliance and best practice.

Among the ideas floated, Bouris revealed an idea for a broker app that records client conversations and uploads them to a cloud accessible by ASIC, banks, aggregators and other key players in monitoring and compliance.

Adding that he believes the chances “right now are 50/50” that remuneration structures will change, Bouris said, “If 20% of our income is lost, the industry will collapse and if our industry doesn’t survive, the banks will just get stronger.”

He added, “We are the easy ones to target. We are fragmented. Banks have teamed up together and they have massive balance sheets and lobby groups, they are politically connected and they are the biggest tax payers in the country – so nobody is going to hurt them.

“If you don’t support the group and something happens that isn’t in your favour, you have only yourselves to blame. Something radical could happen – I’ve seen it happen in the past.”

NSW government suggests banning trail commission

From The Adviser.

Prohibiting the payment of trailing commission could ensure that it no longer contributes to “consumer detriment with higher prices”, according to a new consultation paper from NSW Fair Trading.

In a consultation paper entitled Easy and Transparent Trading – Empowering Consumers and Small Business, released by NSW Minister for Innovation and Better Regulation Matthew Kean, the fair trading body considered reforms to help deliver the Productivity Commission’s agenda for the Innovation and Better Regulation portfolio and weighed in on recent scrutiny of trailing commissions.

The report comes ahead of the release of the Productivity Commission’s final report into Competition in the Australian Financial System, which is expected imminently and – if its draft report is anything to go by – is expected to make several recommendations regarding changes to broker commissions.

Despite the broking industry repeatedly outlining the benefits of trail and suggesting there is no evidence to prove negative impacts of it, the NSW government claimed that the payment of trail increases consumer costs and provides “little incentive” for “sellers” such as brokers to improve consumer outcomes.

The report reads: “In some cases, advisers may be earning these payments by providing the consumer with ongoing advice, regular appraisals of investments and strategy, and other services. In other cases, they are not. The commission is not based on the additional advice. Australia is one of the last markets in the world–along with some lenders in New Zealand–to pay trailing commissions to mortgage brokers.”

It continues: “The problem of trailing commissions is that they result in sellers of products continuing to receive income, irrespective of the level of service they are providing to consumers. This increases costs for consumers,” the report noted.

“Indeed, sellers have little incentive to apply their skills to improve the situation of people to whom they have already sold products.

“Additionally, where the fees are paid by consumers, it can be unclear for consumers what the total cost of the commission will be for the life of the product.”

The NSW government also predicted that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry would “most likely make recommendations on conflicted payments in the financial and insurance sector”.

The government added: “This highlights the need to ensure that all consumers, regardless of the service to which they are referred, have the benefit of consumer protections available in other sectors.

“These commissions contribute to consumer detriment through higher prices. In addition, non-disclosure of such commissions means that consumers cannot make a fully informed choice to proceed with the referred service.”

The state government also proposed the following reforms that it claimed could help address such “issues”:

  • Amending the Fair Trading Act to prohibit providers of services, products or advice from paying trail commissions to intermediaries who recommend or refer customers to their business.
  • Requiring all intermediaries who refer consumers to third parties to fully disclose the benefit the intermediary will receive if a trailing commission will be paid on a successful referral, over the life of the product.
  • Prescribing that a trailing fee or commission is a “key term” which must be fully and clearly disclosed by the service or advisory business when entering into the service contract with the customer. Public comment is sought on the appropriateness of these commissions.

It should be noted, that the latter suggestion regarding a transparent disclosure of trail commissions received by mortgage brokers is already common practice in this sector.

The state government is therefore asking the public to put forward a “workable solution to balance the needs of industry and consumers where trailing commissions impact negatively on the market”.

The proposed reforms in the paper and policy ideas are reportedly “the result of a ‘sweep’ of legislation and regulations in the Better Regulation portfolio, a review of reports by think-tanks and government agencies on the Australian, NSW and other advanced economies and the Minister’s call for ideas from more than 100 think-tanks, industry groups, academics and other stakeholders”.

The public is being invited to provide comments to the consultation paper by 27 August 2018.

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ASIC permanently bans former Westpac banker from engaging in credit activities

ASIC says it has permanently banned former Westpac banker, Marten Pudun of Glenwood, NSW from engaging in credit activities.

An ASIC investigation found that, while employed as a relationship manager in Westpac’s premium banking section, Mr Pudun knowingly or recklessly gave false documents and information to Westpac to help his clients obtain home loans. In relation to 24 loan applications Mr Pudun:

  • helped create false supporting documents including payslips, employment letters and rental estimate letters; or
  • accepted documents he knew were false; or
  • was reckless in not investigating whether they were false.

In one instance, Mr Pudun requested that the employment positions on customers’ employment letters and payslips be changed from Director to Marketing Manager and IT programmer. Mr Pudun said in an email that he did not want the “deal to stuff up” and if the customers were referred to as directors, Westpac may ask for tax returns.

Mr Pudun also asked third parties to create false letters in support of loan applications, which contained weekly rental estimates for various properties. In other instances, Mr Pudun provided example documents to customers so that they could create false documents to support their loan applications.

Mr Pudun also breached Westpac policy in sharing personal client information including internet and telephone banking passwords, customer account opening forms, transaction histories and identification documents with external third parties.

ASIC found that Mr Pudun was repeatedly dishonest in his dealings with his customers, Westpac and external third parties. Therefore, he is not a fit and proper person to engage in credit activities.

ASIC’s investigation is continuing.

Mr Pudun has the right to lodge an application for review of ASIC’s decision with the Administrative Appeals Tribunal.

Background

Mr Pudun’s permanent banning is effective from 24 July 2018.

ASIC commenced its investigation following a notification of misconduct by Westpac.

Westpac has undertaken the following action with respect to those customers whose personal information had been shared:

  • contacted 161 affected customers and had their banking passwords reset; and
  • reviewed the customers’ files and accounts to determine if there had been any instances of fraud. The review did not show any evidence of identity takeover or unauthorised transactions linked to Mr Pudun’s conduct.

Westpac has also reviewed its policies and controls and implemented new systems, processes and employee training to minimise the misuse of customer information.

CBA moves away from conflicted volume-based service model

From MPA.

CBA has announced changes to its volume-based ‘diamond, gold, silver and bronze’ service model for brokers following advice from the Combined Industry Forum and intense questioning at the royal commission.

During the royal commission hearing on 15 March, Daniel Huggins, CBA’s executive general manager home buying, acknowledged that the bank decided to change the volume-based structure after acknowledging that it could create conflicts of interest with diamond brokers being awarded faster turnaround times and better service.

In a note to MPA on Wednesday, Huggins explained that the new two-tiered system is part of the bank’s “ongoing commitment to support and recognise brokers who are consistently delivering good customer outcomes”.

CBA’s previous model had 11 segments with the top being diamond. Those brokers who qualified had to write at least $15m and/or settle at least 75 CBA loans per year and achieve three out of five quality metrics.

Under the new regime, there will only be two categories: essential and elite.

The model moves away from volume-based requirements, as recommended by the Combined Industry Forum. Instead, a broker’s performance will be assessed on five key quality metrics and five complementary metrics. Their performance will be evaluated on a quarterly basis.

This should help even the playing field for regional brokers who generally have smaller average loan sizes and wouldn’t have made the top tier under CBA’s previous structure.

“We are really pleased to announce a simplified tiered service model with a focus on quality that seeks to recognise and reward our accredited brokers who deliver strong customer outcomes,” Huggins said.

CBA and accreditation

CBA also recently announced that instead of de-accrediting brokers who hadn’t written a loan with the major in 12 months, it would just require them to complete an e-learning training module to ensure they are updated on current products and criteria.

The bank said it will no longer require brokers to write a minimum number of loans to retain accreditation.

In the past, brokers who wanted to maintain CBA accreditation had to submit a minimum of four home loan applications and settle at least three every six months, although according to CBA this was not systematically enforced.

The royal commission revealed that in 2017 CBA revoked the accreditation of 710 brokers due to inactivity.

Bank West Announces Broker Commission Changes

From The Adviser.

CBA subsudary Bank West has announced that it is implementing changes to its broker commission payment model, including changes to trail and the adoption of CIF recommendations, effective from 1 July.

 

Bankwest has said that it is bringing in the changes to “align itself with evolving industry practice and regulator expectations”.

The changes, which will be effective on settlements from 1 July 2018, include:

  • The reintroduction of Year 1 trail commission
  • The reduction of trail commissions in Year 3 to 0.15 per cent and from Year 5 and onwards to 0.20 per cent
  • The adoption of the Combined Industry Forum (CIF) recommendations on paying commissions on utilised funds and net of offset

There will be no changes to the upfront commission rate.

Commenting on the industry recommendations, Bankwest general manager for third party Ian Rakhit said: “Bankwest has been a very long-standing supporter of the broker industry, going back to the very start some four decades ago, and we remain committed to brokers as a channel of choice for customers.”

He added: “We support the current upfront and trail model as well as the improvements to the model outlined in the ASIC review and the Combined Industry Forum (CIF) recommendations.

“We understand the lack of Year 1 trail has been outstanding for some time and we are pleased to reintroduce this to bring us back in line with the market.

“Our contract stipulates that trail commissions represent payment for continuous customer maintenance and services, and we believe trail remains warranted for brokers to ensure ongoing support is provided to customers they refer to Bankwest.”

The bank is the first lender to make major moves to change broker remuneration following the ASIC remuneration review, Combined Industry Forum package reforms and the ongoing commissions.

The Adviser has asked Bankwest’s parent company, CBA, if similar changes will be made by the major bank but has not yet received a response.

Could AI Solve The Broker Problem?

Given the tenor of the Royal Commission responsible lending inquiries this week, which focussed on the complexities of brokers and lenders complying with their responsible lending obligations, we believe the future will be distinctly digital. Our banking innovation life cycle road map calls this out.

To illustrate the point, there was a timely announcement from the Opica Group who have a new, and they claim Australia’s first responsible lending engine” (RELIE). This from The Adviser.

A new artificial intelligence-based expenses verification engine has been launched for brokers and lenders to ensure responsible lending and compliance obligations are met.

Billing the tech as “Australia’s first responsible lending engine” (RELIE), the Opica Group has launched the platform to help “protect any broker or lender from a breach of their responsible lending requirements”.

According to Opica Group founder Brett Spencer, the platform is needed because “lenders traditionally have been very quick to put blame on brokers for any application that goes sour”.

Mr Spencer said that following a tighter regulatory environment and “greater scrutiny being placed on our industry by regulators”, the group identified that “brokers needed something that provided them some protection”.

As such, it built the RELIE platform to enable brokers (and lenders) to perform a “RelieCheck” that could prove they had done the adequate checks into expenses and the consumer’s ability to service the loan.

How it works

The RELIE engine makes use of a specially built artificial intelligence engine, Sherlock™, which analyses a consumer’s banking and credit card transaction data over a period of 12 months and automatically provides “income verification, an understanding of the client’s mandatory expenditure, and therefore their ability to service a loan”.

According to the group, the key differentiator of the RELIE platform when compared to credit checks is that it uses machine learning to categorise transactions, allowing for the differentiation of transaction types, including mandatory versus discretionary expenditure and recurring versus one-off spending.

It also automatically highlights areas of concerns within the transaction data such as undisclosed debts, spikes in expenditure of high-risk categories such as gambling, and possible changes in life circumstances such childbirth.

Mr Spencer commented: “With the advancements in technology and legislation crackdown, we saw an opportunity to protect brokers and automate significant components of an applicant’s income and expense verification process…

“We believe that running a RelieCheck will protect any broker or lender from a breach of their responsible lending requirements.”

Speaking to The Adviser, Mr Spencer elaborated: “While a credit check simply looks at your credit worthiness, a RelieCheck looks at the consumer’s 365-day spending and income transactions and interrogates the data from a responsible lending perspective.

“It then presents back to the broker or lender a summary of exactly what, when and where an applicant’s income and expense are positioned.”

However, the Opica Group founder said that while the AI engine “does all the grunt work” to auto categorise and allocate spends to a range of buckets (such as mandatory versus discretionary expenses), the broker is able to review each category of spend and re-allocate expenses to a different category as part of their responsible lending discussions with the customers.

Each change made is then notated by the broker in order to meet their responsible lending requirements.

Revealing that the engine has been 16 months in the making, Mr Spencer said that the group wanted to “create a platform that a broker could use to protect themselves from any unintended breach of their responsible lending requirements”.

He added: “We also wanted to speed up the physically demanding process of paper-based statement reviews so that a broker could reduce the amount of time it takes to process a loan, and in the process providing a far greater service to the customer.”

Opica Group revealed that “early indications” have shown that by performing a RelieCheck on an applicant, a broker or lender could reduce processing times by approximately 90 minutes per application (when compared to manual assessment of the applicant’s banking and credit card transactions).

Mr Spencer concluded: “We want to create a new industry standard.

“Data is a commodity, but what you do with the data is the key ingredient.”

He added that he did not believe anyone else was thinking about “what we do with the data to aid the lending process”.

Opica Group is reportedly working with a number of aggregators and lenders to establish whether the engine could be integrated into their customer relationship management (CRM) systems. The service costs $15 (plus GST) per applicant for a broker account, or $10 (plus GST) per applicant for an aggregator or lender account.

Broker or Banker – Which is Best?

Well, according to new research from Roy Morgan, home loan customer satisfaction with banks when using a mortgage broker was only 77.3%. This compares to 80.3% when home loans were obtained in person at a branch. So Banker is best….

Even among more recent home loans (held for under six years) satisfaction with going directly into branch was 81.7% compared to 78.7% for mortgage brokers. This is an important finding because it illustrates the potential impact that a third party can have on the satisfaction level of customers with their banks.

These results cover the six months to January 2018 and are from the Roy Morgan Single Source survey of over 50,000 consumers per annum, including over 12,000 mortgage holders.

Nearly all of the largest banks home loan customers have higher satisfaction with their bank when they obtained their loan in person at a branch, rather than through a mortgage broker. Home loan customers of Bendigo Bank who obtained their loan in person at a branch had the highest satisfaction with 92.6%, followed by Bankwest (87.3%) and St George (86.8%). The best of the big four was NAB with 82.4%, followed by ANZ (79.7%). All of the largest banks, with the exception of Westpac, had higher satisfaction when going direct rather than using mortgage brokers.

Home Loan Consumer Satisfaction: Obtained through Branch vs Mortgage Broker2 – Largest Home Loan Banks1

Source: Roy Morgan Single Source (Australia). 6 months to January 2018, n= 6,052 Base: Australians 14+ with home loan. 1. Based on largest number of home loans purchased at a branch. 2. Excludes other methods of obtaining home loans. 3. Includes brands not shown.

Satisfaction when using mortgage brokers was highest for St George with 85.6%, Bankwest (82.1%) and Suncorp Bank (82.0%). Each of the big four were below the market average (77.3%) for home loan customer satisfaction when using a mortgage broker, with the best of them being NAB (76.4%) and Westpac (75.7%).

Home loan customers go in person to branch

Despite many channels available to obtain home loans, over half (52.4%) of all current loans were sourced from going in person to a bank branch. This is well ahead of the 34.3% who purchased their loan through a mortgage broker. With these two channels accounting for 86.7% of the current market, it is important for banks to know how they perform in each in terms of customer satisfaction.

Method Used To Obtain Home Loan

Source: Roy Morgan Single Source (Australia). 6 months to January 2018, n= 6,052. Base: Australians 14+ with home loan
Other channels used to obtain home loans were, ‘in person with a mobile bank representative’ (8.7%, satisfaction 78.9%) and ‘over the phone’ (4.0%, satisfaction 80.3%).