Landmark report sparks commissions debate

Mr Kitchen’s remarks come after last week’s comments by the RBA and the release of the Trowbridge report on life insurance and advice, which included recommendations about upfront commissions in the insurance space.

“Upfront commissions have been an issue in the insurance industry for a long time, as highlighted in both the Trowbridge report and in ASIC Report 413 which was issued last year,” Mr Kitchen said.

“It could have a domino effect onto other professions."

Mr Kitchen said the Trowbridge report – which makes 11 recommendations, with adviser remuneration changes top of the list – represents “a major change” to the financial services industry.

“It’s fundamental,” he said. “Whether that applies to mortgage brokers, there is no doubt that that will come across.

“You [mortgage brokers] will be examined. If you rely on income from a third party, that’s definitely going to be under the spotlight in financial services.”

The Trowbridge report recommends that insurance commissions be capped at 20 per cent, with an initial advice payment not exceeding $1,200 per customer.

While Mr Kitchen fears that broker commissions will soon be under review, financial planner and mortgage broker Tony Bice believes mortgage broking and the provision of financial planning and risk advice are “two different animals” and should not be compared.

“When I first started as a broker nearly 15 years ago, the mortgage broking market share represented less than 5 per cent of all borrowers,” Mr Bice told The Adviser.

“It is now around 50 per cent. That tells me that the industry is growing from strength to strength and the services provided by brokers are here to stay and are valued by consumers."

Mr Bice said the broking industry has come a long way, and legislation like the NCCP has made brokers much more accountable and professional in the way they go about doing business.

“You don’t hear the term ‘churning’ used nearly as much in the mortgage broking industry as you once did,” he said, adding that there needs to be clear, documented proof, under the NCCP, that a recommendation represents a benefit to the client, such as a lower interest rate or a better suited product.

“It’s not quite as easy with a risk product such as life insurance," he said. “How do you justify switching a client from a million-dollar policy with one life insurer to the same type of policy with another insurance group?

“To compare a mortgage broker, the services they provide and the remuneration they receive to ... a financial planner with regards to the way they provide advice and are remunerated, I don’t think is entirely correct.”

Last week, the Reserve Bank warned that an increased use of mortgage brokers as a distribution channel is creating risks for lenders and borrowers.

In its Financial Stability Review, the RBA said industry estimates indicate that 40 to 50 per cent of new housing loans are now arranged through mortgage brokers.

“The more banks use brokers, the greater is the risk that a misaligned broker incentive structure would generate significant amounts of lending that is outside their risk tolerance or is otherwise inappropriate,” it said.

Speaking at the release of Deloitte's Australian Mortgage Report 2015 last week, Kevin Nixon, leader of financial services at Deloitte, said conduct in the financial services industry has been a big issue and will continue to be a big issue globally.

“It is certainly in the sights of regulators, observers, politicians and other stakeholders around the world,” Mr Nixon said.

“In this country, we have seen a lot of provision for financial advice. It has been on that distribution of wealth products. But you haven’t seen it in the banking area.”

Mr Nixon said there are strong concerns within the banking sector that the regulatory spotlight in the wealth space will soon turn towards the mortgage market.

“It is beholden to everyone in the industry to make sure their standards are up to scratch because they will certainly be under the spotlight going forward,” he said.

[Related: Industry bodies hit back at RBA]