The newly released reform package from the Combined Industry Forum has outlined changes to remuneration structures, including changes to upfront and trail commissions.
Noting that the ASIC report into broker remuneration proposes that the standard commission is changed to reduce the risk of poor consumer outcomes, the Combined Industry Forum (CIF) recognised the potential for financial incentives “to put good customer outcomes at risk where they encourage customers to borrow more than they need”.
The CIF therefore stated that industry participants may address this risk by adopting the following remuneration principle: “To the extent that remuneration relates to loan size, remuneration should relate to the funds drawn down and utilised by a customer”.
It suggested that this principle could be satisfied where:
- Upfront commission is paid on a utilisation basis (i.e., based on facility limit drawn down by the customer and, in cases where the loan has an offset account, on the amount drawn down net of offset account balances);
- Trail commission is paid on the amortised drawn-down amount net of offset account balances or based on facility utilised;
- Clawbacks remain part of the standard commission structure.
The CIF explains: “Generally, funds drawn down would be measured and commission paid on initial settlement and at a later point in time for subsequent drawn-down amounts, up to the maximum facility limit.
“The CIF recognises that this approach to funds drawn down and utilised may require further consideration in certain limited circumstances, such as residential construction lending.
“As long as this principle is satisfied, there should be no restrictions placed on lenders adopting additional methodologies of calculating commission payments.”
Speaking to The Adviser about clawbacks, Combined Industry Forum chairman Anthony Waldron said: “Clawbacks play a role in ensuring that there is an ongoing level across both lenders and brokers.
“They are an important part of ensuring that the lender satisfies their requirements, for example, if it goes into arrears or is switched out in a very short period of time, etc., there is potential loss there for the lender. So, it [clawbacks] acts as a ‘no change’ component to the loan.”
These changes are expected to be implemented by the industry by the “end of 2018”.
When trail can be withheld
The report went on to outline that as well as these changes (and ongoing training, education and recognition), it considers that good customer outcomes “are promoted by withholding the trail commission” in certain conditions.
These conditions are:
- When a loan is 60+ days in arrears; and/or
- When a loan is found to have been calculated using inaccurate information, allowing a customer to receive a larger loan (trail not paid if any fraud found in the application); and/or
- When a loan is refinanced or restructured, which may be potential evidence of not being fit for purpose.
These trail changes are expected to be implemented by the “end of 2020”.
Removal of bonus commissions and payments
ASIC’s report into broker remuneration noted that volume-based and campaign-based bonus commissions that supplement the standard commission model can create potential conflicts of interest and “higher risk that brokers will place customers with lenders for the wrong reasons”.
As such, the CIF has outlined that by the end of this year, industry participants “should respond to ASIC’s recommendation” to cease these payments.
The CIF added: “The industry recognises that volume-based payments from lenders to aggregators can also raise conflicts. Financial support, provided by lenders to aggregators, for compliance education and training that lead to better customer outcomes is not likely to raise conflicts as long as such support is not based on volume of loans written with any particular lender and do not form a condition of being on the aggregator’s panel of lenders.
“Discounted or free aggregation as a result of writing aggregator white label loans, or any specific lender’s loans, has been removed from the industry, and the industry does not support the return of this practice. While not a change specifically proposed by the ASIC report or the Sedgwick review, this move demonstrates the intent of the industry to address areas of potential conflict that may not result in good customer outcomes.”
Soft dollar benefits
For soft dollar benefits, the CIF has outlined proposals to both tiered servicing and conferences/professional development days.
For the former, the forum has said that access to a lender or aggregator’s tiered service model should be determined using a balanced score card, with a maximum 30 per cent volume component, as a proxy for productivity, as well as other criteria aligned to “good customer outcomes”.
Access to a tiered service model will also need be disclosed by the broker where they are recommending a product from that particular lender.
“Such programs should not entitle brokers to preferential customer discounts or to additional payments or commissions,” the report reads. “Instead, these programs should provide preferential service which can assist customers in achieving better outcomes.”
The CIF also stated that by the end of next year, the industry will move to make all conferences/professional development events “educationally focused”, with an aim of “continually improving customer outcomes”. They would need to have a minimum of 80 per cent identified education content.
The forum emphasised that locations for conferences/professional development “must be business appropriate and not likely to cause reputational harm to the industry”.
Lastly, the CIF noted that “the provision of high-value entertainment and hospitality may raise the risk of lender choice conflicts” and, therefore, it stated that, by the end of 2018, lenders should not provide entertainment or hospitality to mortgage brokers that has a value of more than $350 per person per event and is not based on the volume of loans written by the broker.
“This value was chosen to align with Fringe Benefit Tax (FBT) reporting, which enables lenders and aggregators to use existing reporting for better monitoring and supervision,” the report reads.
For entertainment or hospitality above $100, lenders, aggregators and brokers will be required to maintain their own register of entertainment and hospitality benefits (given or received) on a rolling 12-month basis, with records kept for three years. This register will also be advertised in the Credit Guide provided to customers and monitored by aggregators and details provided on request.
However, the CIF outlined that “entertainment and hospitality” does not include professional development and education events that meet the requirements outlined above.
Mr Waldron told The Adviser: “This is an industry-led package of reform. So, the industry will implement this. While I’m sure Treasury will have views on different components of it (and this has been a consultative process throughout), we are going to implement the changes in the package as an industry. And then we will continue to work on getting measuring and implementing changes that we need over time.”
He added: “We are not waiting for anyone’s approval. We are going to be implementing this at an industry level.”
The Combined Industry Forum report revealed that there were 38 groups collaborating on the response, including the four major banks, five industry associations, aggregators, brokerages and consumer group CHOICE.