A major aggregator has published a comprehensive response to the banking royal commission’s “fundamentally flawed” mortgage broking recommendations.
Mortgage aggregator Connective has issued its response to commissioner Kenneth Hayne’s recommendations, outlined in the final report of the Royal Commission into Banking, Superannuation and Financial Services Industry.
The 16-page report, titled Protecting Choice for Australians, seeks to correct misconceptions about the mortgage broking industry and specifically addresses commissioner Hayne’s reform prescriptions, including his call for a borrower-pays remuneration model and the introduction of a “best interests duty”.
In its report, Connective provides responses pertaining to four “myths”, which have emerged in critiques of the broking industry’s current model.
In response to suggestions that trailing commissions are a “fee for no service”, Connective noted that such payments were previously put in place to deliver better outcomes for borrowers.
“Trail commission represents a deferment of the fee payable to the broker and a sharing of the risk (and revenue) of the loan,” the aggregator stated in its report.
“Historically, upfront commissions paid by lenders to mortgage brokers were much higher than they are now, with no trail subsequently payable. In order to reduce their upfront costs (especially if a loan was prepaid early), lenders moved towards the current model of a lower upfront commission plus ongoing trail commission whilst the loan remained outstanding and performing.”
Connective continued: “Trail commissions provide recognition and incentive for brokers to provide additional support and services to the customer.
“Over time, having access to a mortgage broker who provides the support to ensure customers remain with the most appropriate product for them is valuable.”
The aggregator also noted that the payment of trail commissions creates a disincentive for a broker to “churn” home loans.
“Removing trail commissions, as recommended by Hayne in the final report, will only add to diminishing competition in the home-lending industry whilst further profiting the banks,” Connective noted.
Connective went on to address claims that mortgage brokers act on behalf of lenders not brokers, stating that if a mortgage broker failed to look after their customers’ best interests, they “would not have a sustainable business”.
“The majority of mortgage brokers are small businesses and, generally, they rely on personal references and word of mouth for business; their quality of service and integrity are critical to their survival,” the aggregator stated.
Connective added that the rates of upfront and trail commissions are “largely uniform” across the mortgage market, noting that “there is no benefit for mortgage brokers to act on behalf of a lender opposed to their customer”.
“The mortgage broking industry has already acted to remove any perceived incentives from lenders and correct any misconception that they are not acting on behalf of borrowers first and foremost,” the aggregator continued. “Incentives from lenders such as volume-based payments and soft dollar benefits, which are potential avenues for a lender to influence a broker, were prohibited from 31 December 2017.”
The third myth that the Connective sought to dispel was that brokers are “excessively remunerated for relatively simple work”.
In response, the third-party mortgage business stressed that most people are unaware of the time brokers dedicate to each of their clients to ensure applications are successful the first time, or the time spent answering questions, educating and supporting their customers to make good decisions or resolve their individual credit issues.
“Whilst brokers deal in rate, flexibility and convenience, one of the most valuable aspects of a broker’s role is in solving and managing the ever-increasing complexity in Australia’s home lending market,” the aggregator said.
“As most brokers know, credit policy, documentation requirements and credit appetite of lenders is varying with increasing frequency and amplitude.
“Helping customers navigate increasing complexity is an ongoing service that brokers provide. In addition, a broker assists their customers with post-settlement matters, much of which derives no additional revenue for the broker and, in some circumstances, may result in a reduction of that broker’s revenue (through a repayment of loan).”
Finally, the mortgage aggregator sought to bust the myth that destroying mortgage broker viability won’t hinder competition in the home loan space.
Connective referenced to comments made by economist Henry Ergos, who observed: “But if there is such a thing as an undeniable fact, it is that the rise of mortgage brokers and financial advisers did more to inject competition into the financial services industry than decades of efforts by governments and regulators combined.
“They introduced comparison shopping into an area where consumers find comparisons notoriously hard to make. And every bit as importantly, they acted as distribution outlets for smaller providers — such as credit unions — that lacked (and lack) a national retail presence.”
Response to recommendations
Moreover, in its report, Connective reiterated its position on the recommendations outlined by the banking royal commission.
Reflecting on the commission’s call for a best interests duty, Connective stated that it supports the legal obligation, but argued that it would be “inconsistent” and “ineffective” if it wasn’t applied to lenders.
On the proposed introduction of a borrower-pays remuneration model. Connective said that it “unequivocally rejects” the recommendation, which it said seeks to reform a model, which is “not fundamentally broken”.
In response to the commission’s call for a Treasury-led working group, Connective said that while it would support the move, the working group should be established prior to the implementation of changes, rather than to review the impact of proposed reforms after implementation.
Connective flatly rejected commissioner Hayne’s recommendation for brokers to be subject to the same legal obligations imposed on financial advisers
“It is important to maintain clear separation between credit assistance provided by mortgage brokers and finance advice provided by financial advisers,” Connective stated.
“They are completely different roles with different requirements and responsibilities.”
However, the aggregator expressed strong support for the commission’s call for ACL holders to be bound by information-sharing and reporting obligations.
Connective added: “We also back the calls for ASIC to have a broker register. We would like to see laws create a safe harbour for those who are responsible for reporting the misconduct.”
The aggregator concluded by reassuring the broking industry that it would work to deliver positive outcomes for the sector.
“There is still uncertainty around what the final recommendations will look like, and any real change is some time away,” Connective stated.
“We will continue to work hard to stand by our broker network and the industry; we have your back now, tomorrow, and in the future.”