The financial services regulator has backed claims from the Productivity Commission that “there are conflicts of interest” in the way that home loans are sold through mortgage brokers “where some of those mortgage broking firms may be owned [by lenders] as well”.
Speaking at the Parliamentary Joint Committee on Corporations and Financial Services on Friday (16 February), the Australian Securities & investments Commission (ASIC) was asked a range of questions about conflicts of interest in the financial planning industry.
Touching on ASIC’s recently-released report regarding vertically-integrated institutions and conflicts of interest, deputy chair Peter Kell noted that while it “probably wouldn't have come as a surprise to anyone to see that there would be some sort of bias towards internal or in-house products”, he added that ASIC’s question was to establish the extent of this and “whether that was associated, in some cases, with poor quality advice”.
He noted that financial planners, who are bound by a ‘best interests’ standards, are inherently conflicted – adding that some brokers are too.
Mr Kell said: “[T]here is an inherent conflict of interest — it's not prohibited, but it's a conflict of interest — when you have an entity which is a product manufacturer and a product distributor and when, at the end of the day, there is an obligation to act in the client's best interest.
“The question is: how is that playing out in practice and how are those conflicts of interest being managed? That's clearly one of the key aims of this report, to get a better picture around that.”
The deputy chair echoed claims made by the Productivity Commision in its draft report into competition in the Australian financial system, which argued that brokers who process loans through lender-owned aggregators could be facing conflicts of interest.
Mr Kell said: “All of us in one way or another have conflicts of interest in different parts of our professional lives.
“There are conflicts of interest that are there in the vertically integrated model [in financial planning] just like there are conflicts of interest, for example, that are there in the way that home loans are sold through mortgage brokers w[h]ere some of those mortgage broking firms may be owned [by lenders] as well.
“Some conflicts in remuneration have now been prohibited - that's not what this is looking at. There are other conflicts in terms of the structure of businesses that are allowed. The key question is: are they being managed appropriately? Some of those conflicts might be associated with other sorts of benefits, which means you would say it's better to manage them than to try and rule them out altogether.”
The new ASIC chair James Shipton said that “the same thing can actually [be] said with horizontal business loans".
"There are conflicts that need to be managed both horizontally and vertically,” he added.
‘Difficult to get a yes or no’ on conflicted remuneration
When asked whether mortgage brokers should come under “conflicted remuneration laws”, Mr Kell said: “There's been a lot of work done on this, so it's difficult to get a yes or no answer, but we've obviously highlighted in our report that we think there are some aspects of the way that remuneration works in the mortgage-broking sector that would be better to take out of the sector because they raise unreasonable conflicts.”
For example, ASIC's review into broker remuneration found that the current structure was generally sound, but suggested that lenders “move away from giving soft dollar benefits” to brokers as they “increase the risk of poor consumer outcomes and can undermine competition”.
At the Parliamentary Joint Committee on Corporations and Financial Services on Friday, ASIC was asked if it would seek to ban vertically-integrated models from financial planning.
Mr Kell said: “That wouldn't really be our call. An interesting question might be whether the Productivity Commission will look at that issue. I think they've made a recommendation about ensuring greater transparency around ownership and ownership links - not just in this area but also in the mortgage-broking area."
Mr Kell concluded by saying: “[I]n most of the areas we regulate we are not regulating for a particular business model. We are regulating for appropriate consumer outcomes and appropriate advice being provided or appropriate products getting into the right hands.”
This focus on ownership and conflicts of interest has been of increasing interest for the regulator, whose review into broker remuneration last year recommended that there be clearer disclosure of ownership structures within the home loan market to improve competition.
To reduce the impact of ownership structure, ASIC proposed that participants in the industry “more clearly disclose their ownership structures”.
However, the Productivity Commission has gone a step further by calling 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.”
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