Greg Medcraft, the chairman of ASIC, has suggested that he would be tempted to place consumers in larger loans to get higher commissions if he were a broker, due to commission structures.
Speaking at a Reuters Newsmaker event on Tuesday (12 September), Mr Medcraft touched on a recent report from investment bank UBS, which suggested that around $500 billion of mortgages could be based on inaccurate information.
While admitting that he had not read the report, the chairman of the financial services regulator said that ASIC was cracking down on inaccurate loans and that lenders would have to change the way they assess borrowers’ actual living expenses. He also suggested that the body could take more lenders to court over responsible lending failures, as it has done with Westpac.
Additionally, Mr Medcraft suggested that the current broker remuneration structure could be tempting brokers to place consumers in larger loans than necessary, and revealed that he would be tempted to do so if he were a broker.
In a statement reported by media and confirmed by ASIC, Mr Medcraft said: “The mortgage commission is based on [the fact that] the larger their loans, the more you get. So, logically, what would you do?
"It's human behaviour. I'd do it.”
‘Just as well he’s not a broker’
Speaking to The Adviser following the startling admission, the executive director of Finance Brokers Association of Australia (FBAA), Peter White, said that it was "just as well he's not a broker, because that is not the behaviour that brokers undertake".
"I speak to thousands of brokers every year, and talk to brokers on a daily basis, and nobody takes that position. The reality is that brokers have the best interest of the consumer at heart. The reality is that brokers are restricted by loan size, and they are there to meet the best interests of the borrower. And they have servicing requirements that govern all that from the lenders.”
The FBAA executive director continued: “It's not like you can just write a large loan; there are restrictions on cash out, use of funds, etc.; a whole host of things that interplay that stop that from happening, as well as the fact that the vast majority want to do the right thing anyhow. So, it's just not on the table; it's not a card that's played."
While Mr White acknowledged that fraud does happen in the industry (as with any industry), there were systems and educational programmes in place to ensure that fraud was “stamped out”.
He concluded: "We're lucky that Mr Medcraft isn't a broker, because he would be one of our problems if he were."
While the head of the MFAA has not commented on Mr Medcraft's quote specifically, CEO Mike Felton said: "A broker’s business is dependent on positive customer outcomes and referral business on the one end of the spectrum and faces clawback and consumer protection legislation on the other end of the spectrum, giving brokers a lot of incentive to behave responsibly.
“Having unaffordable loans that go into default is in no one’s interest, and a broker is highly unlikely to put their entire business at risk for the sake of a modest short-term gain."
Touching on the UBS report's findings regarding mortgage inaccuracies, Mr Felton continued: "The broker is an intermediary in the process that plays a key role in taking reasonable steps to verify a client’s financial situation. But the broker is critically reliant on the completeness and honesty of the disclosure provided by the customer, and it is the lender that makes the final decision on affordability and whether the loan is approved or declined."
ASIC seeks to ‘improve’ broker remuneration
Mr Medcraft's recent statement emphasises ASIC's position that broker commissions should be changed; the financial services regulator has previously proposed that the standard commission model be "improved" so that it is not tied to the size of the loan.
In its Review of Mortgage Broker Remuneration, ASIC said: “The standard commission model of upfront and trail commissions could encourage brokers to place consumers in larger loans, even when this may not be in the interests of the consumer. To reduce the risk of this occurring, we propose that lenders change their standard commission arrangements so that brokers are not incentivised purely on the size of the loan.”
It suggested that lenders could instead calculate upfront and trail commissions by reflecting the loan-to-value ratio (LVR) of the loan (and other considerations such as compliance metrics). However, some lenders have suggested that this model could negatively impact first home buyers.
On Tuesday, Mr Medcraft also reiterated ASIC’s volume-based incentives and “soft dollar” benefits, which ASIC has said the industry should “move away” from as they could “increase the risk of poor consumer outcomes”.
However, the ASIC chairman has previously championed the third-party channel, telling ABC’s program The Business in March that “the bottom line is that brokers deliver great consumer outcomes” and that they “shouldn’t necessarily be blamed” for any potential mortgage stress.
Speaking of the remuneration review, the MFAA CEO told The Adviser: "The ASIC Broker Remuneration Review was a well-informed and well-considered process based on extensive data. ASIC made six recommendations, which the industry is in the process of addressing through the Combined Industry Forum.
"Our industry has a strong focus on consumer outcomes and we look forward to updating government of our progress later this year."
Annie Kane is the editor of The Adviser magazine, Australia’s leading magazine for mortgage brokers. As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also the host of the Elite Broker podcast and regulator contributor to the Mortgage Business Uncut podcast.
Before joining The Adviser team at Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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