Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
I had the chance to discuss the current state of the mortgage industry with Founder and CEO of Hashching Mandeep Sodhi.
Our conversation covered the recent underwriting tightening, mortgage prisoners, how brokers are helping borrowers navigate the new rules, and the rise of digital channels.
A substantial reduction in reported “misstatements” was primarily due to a “material improvement” in the quality of loan applications submitted via the broker channel, according to a new UBS report; via The Adviser.
According to the investment bank’s latest Australian Banking Sector Update, which involved an anonymous survey of 1,008 consumers, there was a “sharp fall” in the number of “misstatements” reported in mortgage applications over the fourth quarter of 2018 (4Q18).
The survey revealed that 76 per cent of respondents reported that the mortgage applications were “completely factual and accurate”, up from 65 per cent throughout the first three quarters of 2018.
According to UBS, the improvement in lending standards was largely driven by the scrutiny placed on the industry by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and not off the back of regulatory intervention.
“We believe this implies that despite the efforts of the regulators and banks to tighten underwriting standards from 2015 onwards, these appear largely ineffective,” UBS noted.
“Our survey suggests that improvements in factual accuracy in mortgage applications have only come in response to the royal commission.”
The bank stated that the improvement was spurred by a “material improvement” in quality of mortgages submitted through the broker channel.
The research found that 26 per cent of borrowers who applied for a mortgage via the broker channel in 4Q18 “misstated” their loan application, down from 41 per cent in previous quarters.
However, UBS noted that fewer borrowers reported misstatements in loans submitted via the propriety channel (19 per cent).
Despite the improvement, UBS claimed that it’s concerned about the 10 per cent of respondents that reported that their broker-originated applications were “partially factual and accurate”, which it considers a “low benchmark”.
Moreover, UBS stated that it continues to find that a “substantial number of applicants state that their mortgage consultant suggested that they misrepresent on their mortgage applications”.
According to the figures, of those who misstated their broker-originated loan applications, 40 per cent said that their broker suggested that they misrepresent their application, which UBS claimed implies that 15 per cent of all mortgages secured via the broker channel were “factually inaccurate following the suggestion of their broker”.
“This is concerning given the heightened scrutiny on the industry, in particular following findings of broker misconduct and broker fraud in the royal commission,” UBS added.
Additionally, the report noted that 15 per cent of respondents who misrepresented information in a broker-originated application said that they exaggerated their household income, and 31 per cent said that they under-represented their living costs.
Turnaround times
The UBS research also revealed that 63 per cent of respondents who submitted a loan application via the direct channel received approval for the mortgage in one week or less, compared to 48 per cent of respondents who submitted via the broker channel.
Further, UBS stated that 31 per cent of direct-channel applicants received approval for a mortgage in two to four weeks, compared to 43 per cent of those who applied for a loan through the broker channel.
However, the investment bank added that when examining the approval duration between those who were completely factual and accurate on their application and those that misstated, “there was no statistically significant difference in mortgage approval duration”.
In the CBA’s full-year 2018 (FY19) financial results, released yesterday, the share of new home loans originated by brokers dropped from 43 per cent in FY17 to 41 per cent in FY18, as they focus on “their core market”.
CBA’s net profit after tax (NPAT) also took a hit over FY18, falling by 4.8 per cent to $9.23 billion, the first profit decline in 9 years. NIM was lower in the second half.
They warned of higher home loan defaults “as some households experienced difficulties with rising essential costs and limited income, leading to some pockets of stress”.
CEO Matt Comyn attributed the decline in profit growth to “one-off” payments, which included CBA’s $700 million AUSTRAC penalty, the $20 million settlement paid to ASIC for alleged bank bill swap rate (BBSW) rigging, and $155 million in regulatory costs incurred from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
“There has been a number of one-off items that have impacted the result, including a couple of large penalties that we have resolved. If you strip some of those out, actually the result looks more from an underlying perspective up 3.7 per cent,” Mr Comyn said.
We discussed the results in our latest video.
The number of broker-originated loans as a proportion of all new business settled by the major bank has dropped alongside a fall in residential lending.
Over the same period, the total number of home loans settled by CBA also dropped from $49 billion in FY17 to $45 billion in FY18.
The bank’s overall mortgage portfolio now totals $451 billion, with the share of broker-originated loans slipping from 46 per cent in FY17 to 45 per cent in FY18.
In its presentation notes, CBA made specific reference to the bank’s focus on its “core market” of owner-occupied lending through its propriety channel, with the number of loans settled through its direct channel rising from 57 per cent to 59 per cent in FY18, and the share of new owner-occupied mortgages also growing from 67 per cent to 70 per cent.
The share of investor loans settled by CBA over FY18 declined from 33 per cent to 29 per cent, now making up 32 per cent of the major bank’s mortgage portfolio.
Interest-only lending fell sharply over FY18, falling by 18 per cent from 41 per cent of new loans settled in FY17 to 23 per cent in FY18.
The proportion of new loans settled with variable rates increased in FY18, from 85 per cent to 86 per cent (81 per cent of CBA’s portfolio).
CBA CEO Matt Comyn attributed the fall in the bank’s home lending to risk and pricing adjustments introduced by the lender over the financial year.
“[We] have been prepared to make some choices from both a risk and pricing perspective, which has seen us grow below system in home lending,” the CEO said.
“We will continue to make the right choices from volume and margin as we think about our home lending business. But overall, the core franchise of the retail bank has continued to perform well.”
Mr Comyn also claimed that despite slowing credit and housing conditions, he expects the bank to generate 4 per cent credit growth in FY19 and noted that CBA would not be looking to make any further changes to its lending policy.
“Consistent with the remarks from the chair of APRA, we see that the majority of the tightening work has been done, certainly at the margin, and there’s certainly some potential in the application of those policy changes,” the CEO continued.
“[We] certainly don’t see any big policy adjustments on the horizon. We feel like that 4 per cent credit growth, given what we’re seeing at the moment in the system, is about right, and of course, it’ll be a function of our performance against that system.”
Abolishing trailing commissions for mortgage brokers would reduce competition, drive up home loan rates and make banks the “unintended beneficiaries”, the Australian Finance Group has warned.
Speaking after the release of the Productivity Commission’s final report on competition in the Australian financial system, which recommended that the government remove trail commissions, the aggregator warned that such a move could be counterproductive and potentially lead to reduced competition in the financial system.
AFG CEO David Bailey cautioned that any move to ban trailing commissions for mortgage brokers would have the impact of consolidating the lending base of the banks, stating: “This is ironic given the tone of the majority of the final report. Consumers have been voting with their feet in greater numbers for over 20 years and increasingly use brokers for better service and less costly, better-suited home loans.
“Mortgage brokers are encouraged through trailing commission to stay with customers for the life of their loan, to review products and add value. It is in the business interest of brokers to work for their clients through the years to help them continue to gain better finance outcomes as circumstances change.
“Banning the incentive to work with customers for longer durations would have a detrimental impact on the very services that brokers help provide — greater competition.”
Mr Bailey echoed the thoughts of several other heads of industry by highlighting that ASIC’s review of broker remuneration ultimately found no reason to remove trail commissions, adding: “The current structure is not broken. The removal of trail will simply hand more power to the major banks and non-major lenders and consumers will pay the price.
“Since the ASIC broker remuneration review, our industry has come together to address the recommendations from the data-driven ASIC report.
“Excellent progress has been made and a good consumer outcome has been defined. All members of the Combined Industry Forum are actively engaged in addressing the proposals raised by the regulator.
“In light of this progress, momentum-based decisions which ignore the full ramifications of such a move need to be carefully considered.”
The head of AFG went on to say that brokers are filling vital roles in areas that the banks had vacated, and particularly help vulnerable customers, first home buyers and those with complex borrowing needs.
“Providing assistance in these areas takes a lot of time — time that the bigger lenders are often not prepared to give.”
Mr Bailey highlighted that AFG had provided the Productivity Commission with evidence of the savings brokers make for their customers through ongoing contact over the life of a loan, stating that it was “disappointing” the commission “did not give sufficient weight to this evidence”.
“We invite them again to spend time with some AFG brokers to understand the value a demonstrated level of contact with a customer can deliver,” Mr Bailey said.
He concluded: “The last thing Australian consumers deserve is higher prices for lending products and less competition where banks can drive up costs for existing customers.
“We can’t afford to jettison 20 years of competitive experience without giving regard to the findings of other reviews and ensuring a stable, dynamic, customer-focused lending environment remains.”
The final report [674 pages !] has been released earlier than expect, and contains a series of recommendations which will have significant impact on the industry. It also passes the weight test… A best interests test is recommended in the home loan market (a change from not unsuitable).
They call out regulatory failure and conflicts of interest across the sector, referring to opaque pricing, unsuitable products, no reward for customer loyalty as well as product complexity and faux competition. Major players have too much market power, and have fingers in multiple segments of the market. Customers lose out as a result.
“It is a fundamentally important fact that no Australian financial system regulator has the responsibility of putting competition first. Indeed, ASIC does not yet even have competition in its objectives. Nor, until this Inquiry, did other members of the Council of Financial Regulators emphasise that interest in a discernible fashion”.
Some of the key recommendations:
Here is their release:
The head of the FBAA has suggested that the government response to ASIC’s 2017 review of broker remuneration could be delayed until the second half of 2019 if formal conclusions aren’t made before the end of the year.
Speaking at the 2018 Industry Commercial Masterclass in Sydney on Thursday (26 July), the executive director of the Finance Brokers Association of Australia (FBAA) told delegates that he had been meeting with the Minister for Revenue and Financial Services, Kelly O’Dwyer, members of the Productivity Commission (PC) and other government officials to discuss the value of the broking industry.
Peter White revealed that he had asked Minister O’Dwyer when a government response was due on ASIC’s comprehensive report on broker remuneration, given that the consultation on the report had closed more than a year ago.
According to Mr White, the government has decided to wait until it has considered both the PC’s final report into competition in the Australian financial system and the first report from the financial services royal commission.
Noting that the PC’s final report had now been handed to the government, Mr White highlighted that the government had to table the report within 25 sitting days of receipt. Given that Parliament is not back until 13 August, he said that this could mean that the report may not be tabled until October.
He also reiterated that the interim royal commission report is not due until 30 September and that the final report is expected by 1 February 2019.
The head of the FBAA suggested that a government response may therefore not come “until the end of this year”, if not longer, given the country is expecting a federal election next year.
Recalling a situation in 2012 when Treasury was consulting on the second phase of the National Consumer Credit Protection Act (NCCP II) and delayed its response until after a federal election had taken place, Mr White warned that such a scenario could impact the industry once again, given that a federal election will be held next year.
Mr White said: “We may, or may not, get a decision on all this [review of broker remuneration] this year.
“[Minister O’Dwyer] said that, at the end of the day, there will be no determinations made on the ASIC remuneration paper until such time as the royal commission is finished, and those reports are out and the discussion has been had.”
Mr White added: “Bear in mind where we are heading this year, if we do not get decisions on these things before the end of this year, it won’t happen until the second half of the year after the federal election. That is the bottom line, and we’d just have to deal with that and roll with it as we go.”
A multi-channel advertising campaign is being launched by the Mortgage & Finance Association of Australia to promote the value of brokers to the general public.
DFA comments that the industry should focus on fixing the inherent conflicts in the broker channel, as revealed in the Royal Commission. This is not marketing perception problem, it is the reality of current practices! The MFAA are fighting the wrong war… ASIC’s analysis showed that contrary to myth, borrowers who use brokers do NOT necessarily get a better deal.
Starting from this Saturday (7 July) and running through to the end of October, the Mortgage & Finance Association of Australia’s (MFAA) national advertising campaign – developed by creative agency Redhanded, in partnership with MFAA advisers GRACosway and Porter Novelli – will run across regional television, national newspapers, social media, national radio, as well as on billboards, bus stops and on branded buses, among other channels.
Featuring real broker customers, including winners of The Block, Kyal and Kara Demmrich, the advertising campaign aims to highlight the experiences customers have had with brokers and the value they place in the broker offering and service.
Several leading brokers will also front the campaign, including award-winning broker and director of Rise High Financial Solutions Marissa Schulze, and share what their typical day looks like.
The campaign, which runs with the tag line Your Broker Behind You (showcasing that the broker is supportive of the customer and their dreams of home ownership) and utilises the hashtag #findafairerdeal, also aims to involve other brokers.
The 30-second television commercial, social media posts and several other assets are being made available to brokers through the campaign website brokerbehindyou.com.au, and the MFAA is calling on all brokers to post their own videos, photos and posts using the hashtag to create a wealth of content showcasing how Australia’s brokers are making a difference.
‘We have a wonderful story to tell’
Highlighting that broker market share has increased over the past six years, with the MFAA’s recent stats showing that broker market share in the March quarter reached its higher ever figure, the association noted that while the recent negative publicity has not yet impacted the proportion of people using brokers, the association believed it was the “the right time” to come out in a public campaign to “promote and defend” the industry.
The CEO of the MFAA, Mike Felton, commented: “There is no doubt our reputation as an industry has been challenged through repeated regulatory reports, inquiries and negative media coverage over the past year, but we have a wonderful story to tell. Brokers drive competition, value and choice, which creates positive customer outcomes and fairness for all Australians.
“While we are continuing our ongoing efforts in advocacy and education, through such actions as our involvement in the Combined Industry Forum, this campaign will highlight more publicly the value of the mortgage broking industry.”
He continued: “Many broker businesses are comparatively small, but working together, we represent an industry of real significance, which is systemically important to the Australian economy. It’s time to make that size and scale count.”
Mr Felton revealed that the association tested and shaped the initiative with the help of an advisory panel made up of brokers, aggregators and lenders to ensure it reflected the views of the entire industry.
He continued: “We’re focused on the positives. The message is: ‘Your broker is behind you all the way, providing you with a choice of lenders and products, and support for the life of the loan. Your broker is on your side’.”
The marketing campaign comes off the back of calls from brokers for such an advertising campaign.
Several brokers have taken to the comment section of The Adviser in recent months to call on the associations to put out a public-facing marketing campaign on the broker proposition, with one commentator calling on the associations to “launch an Australia-wide media campaign outlining the fact that the banks are in the process of killing the broking industry and when they do consumers will be far worse off”.
Some brokers have already taken steps to rebut the negative headlines and misinformation being disseminated to the public following the financial services royal commission and Productivity Commission’s inquiry into the financial sector.
Tasmania-based broker Lance Cure launched a local TV advertising campaign to strengthen the public’s perception of the broking industry, while Steve Milligan, broker and director of Mandurah-based brokerage Launch Finance, presented a whitepaper for Federal MP Andrew Hastie titled The Value of Finance Brokers and Positive Consumer Outcomes to “get the truth out there about why brokers are doing so well”.
Likewise, the MFAA recently presented to government departments and regulatory agencies a data package to provide an evidence-based rebuttal of the negative reports and to emphasise ASIC’s review of mortgage broker remuneration, which did not conclude that the upfront and trail commissions have detrimental impacts on consumers.
The association also revealed that a new Deloitte Access Economics report, Value of Mortgage Broking, will be released in the coming weeks.
A former CBA chief executive has expressed his views on a potential “dilemma” with mortgage broker commissions and suggested that borrowers and brokers should be liable for the information they provide to lenders; via The Adviser.
Speaking at the American Chamber of Commerce this week, former CBA CEO David Murray AO, who commenced his role as AMP chairman on Thursday (21 June 2018), said that brokers acting on behalf of borrowers “should be liable for compliance” with lending obligations and “should stand with the borrower in any representations made in the loan contract”.
He added that this would require brokers to carry insurance against claims “as others do in like situations in the financial sector”.
Mr Murray’s argument is that when third-party advice is involved in the lending process, then the “advice regime” that financial planners are required to work under should also apply to mortgage brokers.
“The idea that lenders should make reasonable inquiry of a borrower is fair in that it limits malpractice and serious mistakes where some people should never have borrowed. Where lending is clearly accompanied with advice, for example to leverage assets into further investment, then the advice regime should apply,” the new AMP chairman said.
He also reiterated what’s been recommended by the Productivity Commission through its inquiry into competition in the Australian financial system that “any commissions should be disclosed by the broker and made visible by the lender in the loan statement, as happens with lenders’ mortgage insurance”.
“It would be a retrograde step to deny borrowers the value of ‘shopping around’ afforded by brokers. But if they do not know the cost, they cannot make the trade-off,” Mr Murray said.
The insinuation that such disclosures are not made by brokers has been refuted by the broking industry by figures such as the executive director of the Finance Brokers Association of Australia, Peter White.
“The PC suggests there is no transparency in broker fees, yet the commission disclosure requirements under the NCCP are extensive,” Mr White said at a Productivity Commission hearing in March.
Broker commission transparency by lenders a “dilemma”
The AMP chairman additionally acknowledged the challenges associated with lenders making the commissions they pay to brokers transparent in loan statements — in particular, the fact that the commissions depend on certain aspects of the transaction, which are in turn influenced by a range of market forces.
Mr Murray explained: “At present, residential mortgage loans are priced on the basis of a standard variable rate less discount (if applicable). As an established market practice, this has left the industry vulnerable to the allegation of gouging when interest rates change due to the slower repricing of the ‘back book’ which has been of concern to the Productivity Commission and others.”
He continued: “This pricing methodology varies from the more established practice for other variable rate lending, which is typically priced from a base rate (for cost of funds and volume and other costs) plus a margin for risk for the individual loan.
“Under this approach, it is much easier to add third-party costs, making all of the loan costs more transparent to the borrower and overcoming the ‘front book’, ‘back book’ problem.”
The AMP chairman also pointed out the importance of customer accountability, saying that borrowers “should be able to be held to the representations they make in their applications which form part of the loan contract”.
Any change in regards to transparency around broker commissions requires a “first mover”, according to Mr Murray, who noted that it is a “very tricky decision”.
“It is therefore open to the [Productivity] Commission to recommend some form of reference to the ACCC to allow industry practice to change,” the chairman added.
He also warned of the potential consequences of customers using responsible lending legislation and guidelines as excuses for not being able to meet their loan obligations, one being “moral hazard”.
The AMP chairman explained: “The knowledge of potential debt avoidance encourages increased borrowing for higher-risk assets with increased risk of asset bubbles and systemic risk in the economy.”
He likened the potential outcome to the “hand back the keys’ rules in the US which compounded the GFC”.
The other possible consequence, according to Mr Murray, is that lenders “reprice and/or ration credit”, which may not have a significant impact on “the more creditworthy in the community”, but first home buyers, for example, would have to bear the brunt of “more onerous” lending terms.
The AMP chairman implied that overregulation could be counterintuitive to efficiency and effectiveness in his speech, saying that legislation should only apply to cases where the information provided by the borrower to the lender are “clearly inconsistent, meaning that the lender must make some inquiry and judgement”.
Can the law change culture?
Mr Murray also remains unconvinced that legislative reforms or the introduction of new legislation would be effective in changing bank culture, even saying that it is “impossible to regulate for culture”.
He said: “Regulation alone cannot drive a change in behaviour as it can result in a convergence of leadership models and organisational structures, and this limits diversity and competition.
“Organisational behaviour is an intangible asset that is cultivated uniquely by each institution. This makes it hard to set prescriptive guidance and comprehensive minimum standards for all organisations.”
However, Mr Murray endorsed Australian Prudential Regulation Authority’s (APRA) recommendation for a “systems-based approach to culture”, which it presented in its report on governance, culture and accountability within the CBA Group.
Mr Murray said: “Trust will not be restored until institutions revisit existing governance frameworks that may be inhibiting cultural reform.”
Moreover, the AMP chairman believes that oversight of responsible lending obligations should be with APRA, rather than ASIC, pointing to the “systemic dangers of moving from caveat emptor to caveat venditor in the lending market” (or, in other words, going from the principle that buyers are responsible for their purchases to the principle that sellers are responsible for informing buyers of their goods and services).
In his concluding remarks, Mr Murray said: “Given the potential for moral hazard risk to create systemic risk in the financial sector and the economy, caution is needed in allowing contract law to drift from the principle of caveat emptor to caveat venditor.
“Nevertheless, there needs to be protection for consumers given information asymmetry.”
In a letter to its members, the Mortgage and Finance Association of Australia (MFAA) has highlighted the positive impact brokers have on the lending market, quoting new data that confirms a customer satisfaction rate of 92% and a reduction in complaints of 78%.
The industry data, based on figures released last week, highlights a series of positive trends which MFAA CEO, Mike Felton, will present to both the government and ASIC.
“While consumers benefit from the service brokers provide, we continue to be criticised as though the broker channel is systemically rotten. So, we decided to examine additional real data for answers, to bring an accurate presentation to government and to ASIC. The numbers don’t lie,” Felton said.
According to the figures, complaint volumes to major bodies have declined sharply over recent years. While brokers represent 91% of Credit and Investment Ombudsman (CIO) membership currently, complaints against them account for only 6.1% of the total volume received last year – a near 50% reduction on 2008 figures.
Further, brokers account for 1% of complaints to the Financial Ombudsman Service (FOS) and ASIC has made 15 broker convictions between 2010 and 2017, representing one in 9,000 brokers per annum.
Assessing its own complaints data for 2008 to 2017, consumer complaints declined 78% to what MFAA terms a “negligible 55 per year”. The body expelled, cancelled or suspended the membership of 75 brokers over the same period. In 2017, there was less than one consumer complaint for every 21,000 new contracts and the consumer Net Promoter Score currently stand at +70, with customer satisfaction at 92%.
“If our industry was systemically rotten you would have complaints and arrears going up, competition and consumer support declining and you would have interest rates rising. We have a very different picture,” Felton added.
In the first three months of 2018, the broker share point increased 1.7% year-on-year, from 53.6% to 55.3%. Further, in 2017, the major lender paying the highest commission received the lowest market share of Smartline’s business among the four majors.
“It’s a phenomenal performance,” Felton continued.
The message, delivered first hand by Felton during the association’s recent roadshows, also comes in response to recent bad press that has emerged during the royal commission, although he maintains it is not a direct response.
“The first thing to say is that this is not an attack on anybody. This is to say the rhetoric and debate in the public realm has been, of late, predominantly negative and is not consistent with the significant ASIC and Sedgwick reviews, our knowledge and understanding of the industry, and our own research,” he said.
Helping brokers to leverage the positive trends, a series of marketing materials will be made available on the MFAA website to enable members to share the information with their customers.
There are currently 17,000 brokers in Australia and from 2008 to 2017 the average number of loans originating through the channel reached 500,000 per year. In the last four years, the market share for non-major bank lenders has increased from 21.5% to 28%, driving competition and improving customer choice.
“We believe this data will demonstrate to the broker and the broker’s customers, that the channel is very sound,” Felton added.
The new chairman of the ASIC has said that he has been “surprised” that there has been “reluctance, and often resistance, to addressing conflicts, especially those embedded in remuneration” – highlighting the broker remuneration report.
Speaking at the Australian Council of Superannuation Investors Annual Conference on Thursday (17 May), the chairman of the Australian Securities and Investments Commission (ASIC) told delegates that he had been “surprised” by several themes and issues in the financial services sector since taking up the helm of the regulator three months ago.
In his speech, ASIC chair James Shipton said: “My concern is that many people in finance have lost sight of the ultimate purpose of the financial system; they have forgotten that this system is about managing other people’s money…
“I worry that many financial services companies have become insular by focusing only on how they can maximise earnings.
“Accordingly, the first job of the sector is to refocus on these core purposes, instead of exploiting opportunities to make money from its customers often to the consumer’s considerable detriment. This is exemplified by the proliferation of conflicts of interest in parts of the financial sector.”
Noting that conflicts are a “perennial challenge for business”, he added that it was “clear” to him that a number of institutions “have not taken the management of conflicts of interest to heart”.
Mr Shipton said: “This is verging on a systemic issue. Indeed, it is the source of much of the misconduct ASIC has been responding to and which is being highlighted by the Royal Commission hearings.
“The inappropriate sale of financial products in caryards by a commission-driven salesforce is but one example that ASIC has tackled in recent times. And yet conflicts of interests are not new.
So, what has surprised me is that:
- many Australian financial firms have turned a blind eye to the risks that conflicts pose to customer outcomes as their businesses evolved or grew;
- they didn’t have a management system, a management culture, or codes that were attuned to identifying and resolving conflicts; and
- there has been reluctance, and often resistance, to addressing conflicts, especially those embedded in remuneration – even when ASIC pointed them out.”
According to Mr Shipton, this “resistance has, at times, extended to a reluctance to make good any harms caused by conflicts”.
He continued: “Too often, unacceptable conflicts were justified by firms on the basis that ‘everyone else is doing it’, even though it’s the right thing to do to end them.
“A business culture that is blind to conflicts of interest is a business culture that does not have the best interests of its customer in mind. Moreover, it is one that is not observing the spirit as well as the letter of the law.
“And so, it is time for Australia’s financial services sector to remember its purpose – and remember always that they are dealing with other people’s money; it must focus on the outcomes it delivers to its customers.”
Mr Shipton therefore called for a “wholesale review by firms to identify, manage and, if appropriate, remove every conflict.
“Only when this is done can the journey of rebuilding trust with our communities begin,” he said.
Looking back at removing ‘conflicted’ broker commissions
While he said that ASIC favours this option in relation to conflicted payments in advice, he highlighted how the ASIC review of broker remuneration highlighted the “desirability of removing at least some of the remuneration-related conflicts in this sector”.
The new ASIC chair said: “In recent years, the Australian Parliament has banned commissions and other conflicted payments in financial advice. This was a recognition that the best way to deal with some conflicts was not to manage or disclose them, but to remove them altogether.
“This is an option that ASIC favours in relation to conflicted payments in advice. There can be no ambiguity in this area. So, I would strongly suggest that all financial firms keep this in mind when considering how to deal with conflicts of interest arising from remuneration structures.
“We have, for example, in our report on mortgage broker remuneration, highlighted the desirability of removing at least some of the remuneration-related conflicts in this sector.”
While the ASIC report suggested that volume-based and bonus commissions could create conflicts, and should be removed (a suggestion that the industry has largely accepted and is working on implementing, via the Combined Industry Forum), the report did also conclude that the standard model of upfront and trail commissions “creates conflicts of interest”.
ASIC’s report 516: “This standard model of upfront and trail commissions creates conflicts of interest. There are two primary ways in which these conflicts may become evident.
“Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan)…
“Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’,” the report read.
The ASIC remuneration review did not, however, suggest radically changing the commission structure.
It put forward six proposals to improve consumer outcomes and competition in the home loan market, including:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.While no response from government has yet been made regarding what changes, if any, should be made to broker remuneration, it is largely expected that no such response will be made public until the royal commission and Productivity Commission conclude their work on the financial services sector.