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Vertical integration creates ‘conflict of interest’ for brokers: PC

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chess conflict
Reporter 2 minute read

Brokers that process loans through lender-owned aggregators could be facing conflicts of interest, according to the Productivity Commission.

In the Productivity Commission’s (PC) draft report into competition in the Australian financial system, the commission expressed concern over vertical integration in the mortgage broking industry, claiming that lenders are wielding “significant influence” over aggregators.

In its substantial draft report, the PC warned: “Vertical integration can create conflicts of interest for brokers through a lender’s position as both a member of an aggregator’s panel and a shareholder with significant influence over the aggregator’s activities.”

The PC added that lender-owned aggregators are of “greater concern” and are particularly at risk of working against a client’s best interest.

“Lender-owned aggregators therefore face greater conflicts of interest than independent aggregators, and are of greater concern to the commission.”

The commission stated that conflicts of interest are “especially apparent” when lenders fund white label loan products offered through their aggregator subsidiaries.

The PC cited research from the Australian Securities and Investments Commission (ASIC), which found that a lender’s market share through the broker channel was generally higher through their own aggregator subsidiary relative to their share of the overall broker channel.

“This difference was substantial in some cases — in 2015, for example, CBA had a 21 per cent overall market share within the broker channel, but its market share within Aussie Home Loans (in which it had an 80 per cent ownership stake at the time) was 37 per cent,” the report reads.

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While welcoming the industry’s commitment to “more clearly disclose” ownership structures — as advised in ASIC’s review of broker remuneration — the PC called for a legal provision to be imposed by ASIC to require lender-owned aggregators to work in the “best interest” of customers.

Draft recommendation 8.1 reads: “The Australian Securities and Investments Commission should impose a clear legal duty on mortgage aggregators owned by lenders to act in the consumer’s best interests.

“Such a duty should be imposed even if these aggregators operate as independent subsidiaries of their parent lender institution, and should also apply to the mortgage brokers operating under them.”

However, despite arguing that there is a “strong case” for a legal duty of care to be applied to “all brokers”, the PC noted that “in the first instance”, it should apply to lender-owned aggregators with the “potential for the greatest conflict of interest”.

[Related: Association heads slam Productivity Commission findings]

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