Brokers should disclose more information to “minimise the adverse impact” caused by lender-owned aggregators, the Financial System Inquiry has heard.
ME Bank’s submission said that “vertical integration is distorting the way in which mortgage brokers direct borrowers to lenders”, although it conceded there was no “firm evidence”.
The submission said that brokers should be required to recommend products from at least two “independent” banks – that is, lenders that don’t have stakes in their aggregator.
Brokers should also reveal, before a sale, if their brokerage is owned by a product provider and if they may receive any financial benefits from their aggregator, it added.
ME Bank warned the federal inquiry that the major banks and Macquarie own all or part of the top four aggregators, which in turn control 70–80 per cent of the market.
Those banks probably invested in the four aggregators because of the “potential to increase deal flow and source lower-risk borrowers”, according to the submission.
ME Bank said that although brokers disclose their commissions to clients, vertical integration gives banks other opportunities to influence brokers and exercise “inside influence”.
It may also give brokers the means to increase their remuneration in ways that don’t need to be disclosed to clients, ME Bank said.
“For example, where a broker has to pay a fee for utilising aggregator platform infrastructure, such as a computer system, this fee could be reduced if the broker originated a loan supplied by the broker’s bank owner,” it said.
“This fee discount would not need to be disclosed to the mortgage loan customer, but stands as a clear conflict.”
ME Bank said brokers can influence the competitive playing field in ways that are hard to judge.
“Even if a broker is impartial as to the volume of loans directed to competing banks, the broker can reward their owner bank by directing a higher proportion of quality loans – that is, those with LVRs less than 80 per cent,” it said.
Another concern raised by ME Bank was that bank-owned aggregators could tweak lending panel rules in favour of their owner’s products or white label products.
ME Bank told the inquiry that better disclosure rules were needed so borrowers could understand any incentives that brokers may have to steer them towards the bank that owns their aggregator.
That includes notifying clients about the fees and commissions attached to each product, “including any additional financial benefits such as increased pass-through of commission or reduced aggregation fees”, it said.