Peter White, executive director of the Finance Brokers Association of Australia (FBAA), and Mike Felton, chief executive officer of the Mortgage & Finance Association of Australia (MFAA), have both released statements that largely welcome the Australian Securities & Investments Commission's (ASIC) Review of mortgage broker remuneration, which was released last week.
FBAA take on the report
The FBAA said that the ASIC report on finance broker remuneration is “positive for the industry”, with Mr White stating: “In general it is a very good report and supports what I have said for the past 12 months or more, in that base-line commissions are perfectly responsible in our market place and they should not change, while incentives that promote volumes risk poor consumer outcomes and must go.
He said: “Truth comes through transparency, and therefore ownerships and disclosures prove that we as an industry have nothing to hide.”
Speaking to The Adviser last week, Mr White said: “Any incentivisation of volume is problematic because it creates the risk of poor outcomes. So, soft dollar commissions, monthly incentives, promotional incentives are all the wrong styles of things to have in the market place because it puts at risk the appropriate style of outcomes for the consumer, because [they are] driven by money, and not necessarily by best outcomes. The outcome could still be right, but it just puts that outcome at risk.”
He added that incentives for volume, such as those “paid to the aggregator [by a lender] as an incentive for them to encourage the brokers in their group to deal with them” have already “virtually” gone in the industry.
The FBAA executive director said: “This behaviour has virtually gone in the market, because I think everyone knew this [report] was coming… It was a very obvious promotional thing that had to go.”
Brokers can reach 70 per cent of market share
Mr White added that, all in all, he believes the report can help in the drive to ensure the “professionalism and the integrity of this industry is maintained so we can push to get 70 per cent or more market share like they have in the UK”.
He said: “If we don’t have the standards right, then we're never going to achieve it. We have to have our professional standards strong, secure and cemented. And I believe what ASIC is doing in the moment, will achieve that in the main.
“There may be some arguments along the way, I'm sure, but there's nothing that is going to destroy the industry.”
For example, Mr White said that whether some of the data goes far enough to form conclusive outcomes, is “a question that needs to be discussed further”.
“There are a couple of such matters that we have already raised and will be further discussing with Treasury,” he said.
Mr White said the FBAA is continuing in-depth discussions with ASIC on several fronts, and is formulating its response to Treasury in conjunction with input from members and key industry stakeholders.
“We look forward to further discussions with Treasury and we continue to be confident in the positive and sound position brokers’ value-proposition holds for borrowers”, he said.
“For now we need to absorb all that is within this paper and make informed positive responses knowing that fundamentally we have a strong, solid industry.”
Like the FBAA, the MFAA has also expressed broad support for the recommendations made in the ASIC report.
The MFAA’s CEO Mr Felton, commented: “The MFAA is supportive of increased transparency and clarity on regulations in the service of better consumer outcomes – this can only continue to strengthen the sustainability of our industry.”
Touching on the recommendation to leave upfront and trail commissions largely untouched, Mr Felton said the association believed it was “appropriate” to leave the current structure of commissions in place.
He said this was due to the fact that they are “clearly disclosed to consumers and are mostly uniform across the industry, meaning they don’t incentivise brokers to recommend one loan over another. These commissions allow brokers to provide invaluable service to consumers during the process of obtaining a mortgage, and for the life of the loan,” he added.
Calls for caution on some findings
However, the association did “urge caution” over the fact that “many of the findings recommended further study to see if perceived conflicts of interest were actually resulting in poor consumer outcomes”.
“While this report refers to the potential for conflict of interest with regard to some of the incentive structures in use today,” Mr Felton said, “we will continue to work with the government and ASIC to determine not whether these things might cause a conflict, but whether they are actually causing negative consumer outcomes.”
For example, Mr Felton said: “The report has recommended as a general rule that the industry moves away from volume-based incentives, or VBIs, and ‘soft-dollar’ incentives. Again, we accept that some change may be needed, as long as the regulatory focus is on what behaviours the incentive is driving, rather than nature of the incentive itself.”
He added: “Incentives that reward strong performance are a positive element of most industries and sectors, as long as they reward the right behaviours, and do not diminish competition.
The MFAA went on to say that it acknowledges that any remuneration structure that undermines consumer choice and competition “must be reviewed”.
Mr Felton continued: “While we have seen little evidence of VBIs being passed from aggregators and lenders to brokers, we do not support this practice. Similarly, while we are broadly supportive of ‘soft dollar’ incentives to reward high-performing brokers, any incentive that could encourage brokers to recommend specific products or lenders must be looked at.
“We strongly believe the current structure incentivises the right behaviours and encourages competition and choice between lenders – and volume-based incentives allow aggregators to fund critical compliance, training and IT functions that allow them to perform extensive administrative and other services on behalf of lenders, brokers and consumers.
“We believe these incentives — as long as they are not passed on to brokers and do not limit competition and choice — should be retained.”
The MFAA said that ASIC’s review process had been “well-informed and consultative” and that the body “appreciate[d] the level of consultation with industry to understand its complexities and the value that mortgage brokers bring to consumers and to the Australian economy”.
Mr Felton concluded: “We have continued to reinforce to ASIC that brokers drive competition and provide a critical service to consumers that combines choice, expertise and convenience, to help them make informed choices and get the most appropriate deal.
“Brokers rely entirely on referral and customer relationships in building their businesses, and are incentivised in a number of different ways that drive good consumer outcomes.”
The CEO said that while the MFAA will “always support any measures that can help to drive greater consumer confidence in brokers,” it would be “advocating strongly against any new regulatory requirements that place a heavier burden of compliance on our members without a clear link to a consumer benefit”.
Mr Felton added: “We also believe that any action to adjust the current remuneration structures needs to continue to be made with the consultation and understanding of all participants within the value chain.”