The major aggregator has written to the Treasury revealing its thoughts on how broker commission structures could be changed to ensure good consumer outcomes.
As part of the invitation to comment on ASIC’s Review of Mortgage Broker Remuneration (submissions to which closed on Friday, 30 June), AFG has now released its response to the public.
Writing to Treasury’s head of the financial system division, Diane Brown, the broking group noted that the ASIC report “recognises the important role that mortgage brokers can play in promoting good consumer outcomes and strong competition in the home loan market” but warned that it was “essential” that any actions taken as a result of the review “do not have the unintended consequences of stifling or inhibiting the mortgage broking industry which will ultimately be to the detriment of all Australian home owners and all Australians who aspire to own their own home”.
For example, the broking group said that any introduction of a standard fixed fee payable by the lender would “inevitably cause significant market distortions that would lead to a reduction in competition and detrimental consumer outcomes”. It argued that a flat fee would “discourage the provision of services by brokers to customers with larger, more complex transactions”, provide the big four with “the opportunity to increase their existing oligopoly powers (as they would continue to receive the benefits of selling larger loans to consumers), while the absence of trail payments would “discourage the continuation of an ongoing relationship between the broker and the client and make the relationship more transactional”.
Changes to the standard commission model
In its response, AFG stated that the existing commission model for brokers was therefore “not broken” but agreed that borrowers should not be encouraged to borrow more than they require.
It suggested that lenders could reduce this risk to borrowers and improve consumer outcomes by making the following changes to existing commission structures:
1. paying upfront commissions on the drawn-down amount rather than the approved amount (this may necessitate upfront payments being made in tranches, for example for construction loans and lines of credit); and
2. introducing balanced scorecards for brokers that recognise appropriate loan application quality metrics.
According to AFG, these changes should not result in an economic drift away from the broker to the lender “as devaluing the service provided by brokers would have significant and long-term detrimental effects for consumers by lessening the competitive tensions that currently exist in the credit industry”.
It added: “It is essential that anti-competitive conduct is not permitted to proliferate under the guise of regulatory reform.”
Call to remove volume-based hurdles
AFG also suggested that lenders “should be encouraged to consider whether their methodologies for pricing loans should be reviewed to reduce the incentive for consumers to take out larger than necessary loans”.
It said that lenders could implement these changes over time.
Touching on bonus payments, the aggregator agreed that brokers “should not be encouraged to select a particular lender in order to reach a volume-based bonus threshold” and said that the lender practice of termination of a broker’s accreditation for failing to reach such hurdles is “clearly as detrimental as the payment of volume-based incentives” and “should not be permitted”.
As such, AFG said now was “an appropriate time" for the industry to replace existing volume-based incentives (VBIs) with payments that are "more aligned to positive consumer outcomes and the services that are provided”.
It said that work with lenders to develop the “appropriate metrics” to replace VBIs is already underway and will “reflect the quantum of benefit to each individual lender so as not to have a detrimental effect on competition”.
While ASIC has suggested removing ‘soft dollar’ benefits, AFG argued that expenditure should instead be focused on the provision of education and training that enhances the quality of credit assistance services provided to consumers.
The submission revealed that AFG believes vertical integration of mortgage broking businesses is “of concern” and supported ASIC’s proposal to require clear disclosure of ownership structures and public reporting of flows of broker business.
It also suggested ASIC should form a working group with lenders, aggregators and brokers to develop a standard set of information that lenders must supply to aggregators to help them “form a better understanding of their brokers’ conduct”.
Touching on the Australian Bankers’ Association’s Retail Banking Remuneration Review Report (the Sedgwick Review), which was released in April 2017, AFG criticised the report’s comments about the mortgage broking industry stating that they were “misguided and open to allegations of bias or partisanship”, as the ABA has commissioned and financed the report and set its terms of reference.
The submission reads: “AFG has previously raised concerns about the risk of the ABA sponsored review drawing false conclusions about broker remuneration due to the limited and one-sided nature of the investigations that were undertaken.
“It is AFG’s view that the failure to include all relevant stakeholders in the development of the ABA report is so fundamental as to make the associated recommendations nothing more than the opinion of a single interest group with motives that may diverge from the fundamental aims enunciated by ASIC of strengthening the positive contribution of brokers while enhancing consumer outcomes and competition in the home loan market.”
For this reason, AFG urged the government and Treasury to treat the ABA report as “a submission by just one interest group in the mortgage industry”.
However, the group did support the report’s aim to encourage banks to “stamp out the mis-selling of the products that they manufacture and from which they generate significant profits” and agreed that “cultural changes” were needed to achieve this aim.
The submission concluded: “AFG urges the government to act to stop some banks from using the ABA report and the government’s recently announced major bank levy as a justification to implement changes designed to reduce the financial viability of providing broking services and marginalise large portions of the mortgage broking industry.
“If such actions prove successful, competitive tensions in the mortgage market would be significantly reduced and the existing oligopoly powers of the four major banks would grow at the expense of consumers, the broking industry and lenders that do not have large branch networks or other mature distribution networks. These outcomes would not be consistent with ASIC’s stated aim to enhance consumer outcomes and competition,” it said.