A major aggregator has warned that some of the ASIC remuneration review's findings and proposals are “problematic” and “dangerous”, as they are based on undefined concepts and factors that could be unrelated to broker remuneration.
The Adviser has seen Connective’s submission to ASIC’s Review of Mortgage Broker Remuneration (submissions to which closed on Friday, 30 June), which outlines that while the aggregator “recognises” the “extensive amount of work” the regulator completed to produce the review, it did not “necessarily agree with all of ASIC’s findings and conclusions”.
While the ASIC review did not suggest wholesale changes to commissions (or, at least, suggest that any fundamental changes are delayed until a further review is conducted in three or four years’ time), it did suggest that the standard commission model could be amended “so that brokers are not incentivised purely on the size of the loan”.
Connective’s response argued that while “there is potential that the current commission structure of an upfront fee linked to loan value may lead to a broker recommending a larger loan than required”, alternative commissions structures “also raise similar issue or perceived conflicts”.
The aggregator said it had “least objection” to the option of calculating the upfront fee based on the amount actually used at settlement, but recommended that “further consideration be made before any such changes are considered, let alone implemented”.
‘Good consumer outcomes’ definition
Notably, the aggregator went on to suggest that ASIC had “sought to draw conclusions from the data collected without necessarily considering whether there are alternative explanations or factors which drive that data…. which possibly are unrelated to broker remuneration or the behaviour of the broker industry”.
One key area that the aggregator said was “problematic”, was the fact that ASIC looked at broker remuneration through a lens of whether the home loan for a customer created a “good consumer outcome”. It is this definition that Connective has “strong concerns” with, according to the response.
The aggregator’s submission reads: “[W]e do not understand exactly what amounts to a “good consumer outcome” and, similarly, what is a “bad consumer outcome”. This is problematic as without a clear understanding as to what these concepts mean, the findings in the review are essentially based on the subjective opinion and supposition of the author.”
It goes on to censure the review for seeming to “abandon the existing responsible lending framework, instead seeking to solve a poorly-defined problem with an impossible-to-implement solution”.
Speaking to The Adviser, the author of the submission, Connective’s group legal counsel Daniel Oh, elaborated: “This is a common theme throughout submission [and] I think it's a really dangerous if we try and define what a good consumer outcome is without some very detailed thought and consultation.
“We're just really concerned that it introduces a level of subjectivity into the definition; who determines what a good consumer outcome is? Consumers go to brokers for many different reasons, some because they need help with financial literacy, some because they need a range of options to try and get a range of access to lenders that they possibly wouldn’t normally get access to, pricing, loan construction help etc. There are many reasons for it - so how can you determine what a good consumer outcome is for each of those different types of consumers?”
Mr Oh continued: “One of our big fears is that some people could think a good consumer outcome is the lowest rate, or the lowest amount paid. That is very dangerous because you're overlaying someone's view of what 'good' means, into a test where there are different individual circumstances.
“So that's why, in our submission, we go back to the general principles; the loan must not be unsuitable, meet all the regulator guides that ASIC has already released… and [industry should] really be making sure they're enforced, that everyone is focused on supervising that and ensuring they are complied with. If they are, we would hope that 'good' (whatever that means) consumer outcomes flow as a result.”
Shadow shopping exercise
As well as the “good consumer outcome” approach, Connective also had concerns with some of the conclusions drawn from the data collected.
The submission reads: “In certain findings, we believe that ASIC has sought to draw conclusions from the data collected without necessarily considering whether there are alternative explanations or factors which drive that data; explanations and factors that possibly are unrelated to broker remuneration or the behaviour of the broker industry.”
Mr Oh explained: “The sense I got reading some of the findings was that they were looking at this massive amount of data they had collected [and] were trying to work it back to the question they were examining."
For example, Mr Oh highlighted that Finding 5 of the review says that loans put through brokers are larger and more likely to be interest-only, while Finding 8 argues that, for some lenders, loans provided through brokers are more likely to go into arrears than those provided directly to consumers.
Mr Oh argued that these arguments were not backed by a clear framework. He said: “[W]e don’t know exactly on what criteria they controlled that data. We don’t know whether it was accurate or based on an assumption that they applied”.
He added that ASIC’s suggestion that broker clients are more likely to go into arrears is hard to connect to good consumer outcomes and broker remuneration.
Connective’s group legal counsel said: “The greater majority of cases we believe that lead to arrears are unforeseen circumstances; marriage break-ups are one of the most common causes, or maybe someone loses their job, or something else happens. Are these factors that could have been foreseen when the loan was written? It's highly unlikely. So, what is a good consumer outcome and how is that measured?”
Noting that the difference in broker arrears and direct arrears was “not big” (1.25 per cent compared to 1 per cent), Mr Oh continued: “That’s not that large a difference and it feels like they have really magnified that finding but not really taken the steps to dig a bit deeper as to why those are going into arrears. Is it because of what the broker has done? Have they [ASIC] gone through the broker notes for that particular loan? Did that evidence bad advice or that they put the consumer into a bad loan? Is there any causation? I didn't get any sense that that examination had been completed. So, I think it is a bit hard to put a finding like that in without doing those additional steps.”
He added: “We would have liked to have seen a deeper investigation of the differences and consideration as to whether there are other conclusions that could be drawn other than the way the remuneration structure is set up.”
In order for ASIC to understand better how brokers deliver loans for consumers, Connective suggested that ASIC undertake a shadow shopping exercise. This, Mr Oh explained, would “really give ASIC an excellent insight into how brokers operate, the value they give, the amount of time they spend on these applications, the way they guide consumers through the process… and see how much work brokers put into achieving good results for their customers”.
He concluded: “Let's not try and change the commission structure, or try and impose a different standard of good consumer outcomes. Let’s keep the regulatory framework as it is, but push things such as increased data reporting, increased governance and supervisory amongst the industry, and really encourage lenders and aggregators and ASIC to work together and share data. With better data, we can target our surveillance and our brokers better.”