The leading brokerage has told the Treasury that the current upfront commission structure for brokers is “sound” and should not be changed to reflect the loan-to-value ratio of mortgages.
In its submission to ASIC’s Review of Mortgage Broker Remuneration, seen by The Adviser, Mortgage Choice said it was generally “supportive” of ASIC’s review, but argued that the current, standard commission model was “sound” and some proposals may be hard to implement.
Touching on the first proposal, which focuses on “improving” the standard commission model so that brokers are not “incentivised purely on the size of the loan”, Mortgage Choice suggested that no such changes should be implemented.
Writing in the submission, company secretary David Hoskins said that Mortgage Choice believed the current model is “sound and delivers positive consumer outcomes”, adding that the upfront commission structure “appropriately compensates the broker for the time and effort required to lodge an application and take it through to approval”.
He elaborated: “The time and effort involved in this process is significant, it requires the broker to forensically assess the customer’s needs, future needs, income, asset position as well as living expenses, review the current offerings in the market and match the same with a suitable solution.
“The payment of trail commission encourages the broker to put the customer in a product that will be suitable for the consumer over the long term.”
Speaking to The Adviser, Mortgage Choice CEO John Flavell added: "ASIC have made it very clear that the broker channel deliver good customer outcomes. With that said, we believe ASIC will make the right decision for all parties. We are committed to working with Treasury throughout this next period."
The submission also noted ASIC’s finding that there are more interest-only loans in the broker channel, and higher LVRs and loan amounts, but emphasised that this is due to “the demographics of the customers who choose to use a broker and the more complex needs they bring to the table, as well as brokers actively looking for solutions that meet their customers long-term needs”.
“We do not believe that brokers, in general, place loans with the sole intent and purpose of receiving additional commission,” it said.
Looking at ASIC’s example of changing commissions to “reflect the LVR [loan-to-value ratio]”, Mortgage Choice said it would “not be correct” to suggest that it would be effective to change the shape or quantum of broker commissions based on LVR, interest-only or lower loan amounts.
The submissions reads: “Broker economics need to line up with lender economics and consumer outcomes. Markets already price for risk and return driving both lower LVRs and higher loan amounts through discount pricing to the end customer. Unless the regulator is intent on dictating the discounting regimes set by lenders, then the only truly effective mechanism available to the regulator is through being more prescriptive in lender underwriting policy or shaping the economics at the lender end to drive an increase in consumer pricing at the higher risk end of the market.”
When it comes to bonus commissions and bonus payments, Mortgage Choice said it did not believe that these types of payments were a “significant influencer” in terms of where a broker places a loan, and revealed that it only received such payments from two lenders.
Noting that the amount received from its bonus payments was “not significant” and is “pooled and shared with brokers based on the volume of business they write across the lender panel”, it added that it was “not opposed” to the removal of these payments in the industry as it would align it with other parts of the financial industry (bonus commissions and payments have been removed from the financial planning and life insurance sectors).
The brokerage was also supportive of the removal of soft dollar benefits that could influence broker decisions, but thought lender sponsorship and aggregator conferences and events should not be removed if they are linked to broker professional development. “These are essential to the progression and increased professionalism of brokers in our industry,” it said.
Likewise, it said that hospitality benefits “such as tickets to sporting events or concerts” should be advised to the relevant aggregators to enable appropriate monitoring.
Change lender policy and pricing
Indeed, the company position said that if ASIC wishes to change the shape and nature of mortgage lending through broking or through the lending system then there are “two significant levers that need to be used: lender credit policy and lender pricing”.
Speaking to The Adviser, Mr Flavell said: "We have already seen the regulators make changes in the areas of pricing and policy. In March, the Australian Prudential Regulation Authority wrote to all lenders and requested they limit their level of interest-only lending to 30 per cent of all new residential mortgage applications. At Mortgage Choice, we believe the best way for the watchdog and regulator to affect change in the home loan industry is through lender policy and pricing."
Mr Hoskins wrote in the submission: “Influencing lender credit policy would ensure borrowing levels are appropriate based on servicing, LVR and repayment restructure (IO v P&I). By varying lender policy, the regulator can essentially adjust the loan portfolio characteristics...
“Brokers work with borrowers to obtain the most cost-effective lending solution. To suggest that a broker would encourage a customer to borrow more or to borrow at a higher LVR would not be an effective business outcome for a broker who would very easily lose a customer relationship if they did not find a competitively priced lending solution. Furthermore, lender pricing to consumers follows the economics of lending in that the larger the loan the larger the profit for the lender and as such, lenders typically offer larger drive discounts for larger loans. Accordingly, in certain situations, customers’ needs may be well served if they were to borrow just enough to cross the next pricing tier and then place the additional funds in an offset account.”
Mortgage Choice concluded that for commissions, the current structure is “sound”, adding that the “shape and the quantum” of initial and ongoing commission is similar to the commission structures to be adopted in the life insurance industry.
Lastly, Mortgage Choice emphasised that the remuneration review and the ASIC industry funding model review were “inextricably linked” and should be considered together if the end goal is delivering positive consumer outcomes.
It explained: “Ensuring a company has responsibility for governance and oversight is critical to providing good customer outcomes.”
The response outlined that it is “comfortable” with the idea of a new public reporting regime and requirements for more broker oversight, but warned that aggregator and lender information would need to focus on a loan, customer and broker specific level, rather than an overarching view.
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