APRA warns industry about commissions 'risk'

"Regardless of the commission structure, a prudent ADI would recognise the incentives and potential risks inherent in its broker remuneration structure," the regulator said.

"It would have in place appropriate monitoring and controls to guard against incentives to pursue loans with inadequate or false verification, marginal serviceability, excessive leverage or unsuitable terms for a borrower."

APRA told lenders that their remuneration policy must be "aligned with prudent risk-taking".

"A prudent approach to the use of third parties for residential mortgage lending would include appropriate measures to ensure that commission-based compensation does not create adverse incentives," it said.

"Such measures would include consideration of appropriate clawback provisions and ensure that incentive arrangements discourage conflicts of interests and inappropriate behaviour."

APRA angered the industry in June when it released its draft guide, with the MFAA claiming the draft repeatedly implied that broker loans are inherently riskier than loans from other sources.

The final guide said it would be prudent for third-party banks to "closely monitor" performance at brokerages or, where relevant, at the individual broker level.

"Where loans originated by a broker or broker firm have unexpectedly elevated levels of loan defaults, or materially deficient loan documentation and processing, a prudent [lender] would take measures to address such matters including restricting or terminating such relationships."

The Financial System Inquiry is also likely to discuss commissions when it releases its final report later this month.

The federal inquiry received several submissions that criticised commissions, with EY (Ernst & Young) being one party to call commissions a form of "conflicted remuneration".

FBAA chief executive Peter White told The Adviser last month that a flat commission model might reassure the public that the broker was focused on product rather than payment.

[Related: Connective defends importance of trail commissions]