The financial services regulator has told the Productivity Commission that there is now “an industry of referrers” who are often being paid the same amount as mortgage brokers despite doing less work.
At the final day of public hearings for the Productivity Commission’s (PC) inquiry into competition in the Australian Financial System, the financial services regulator outlined its thoughts on a range of topics, including mortgage brokers’ duty of care obligations, broker remuneration, comparison rates and financial advisers giving advice.
Speaking for the Australian Securities and Investments Commission (ASIC), Greg Kirk, the senior executive leader for strategy, and Michael Saadat, the senior executive leader for deposit takers credit & insurers, noted that there was a growing referrer market that is being paid a relatively high commission despite not being bound by the same regulation and compliance as brokers.
Mr Kirk said: “In our work on [broker] commissions, there were a separate category of people who are paid commission who don’t arrange the loan but just refer the borrower to the lender. It seems to be that professionals — lawyers, accountants, financial advisers — are reasonably prominent among people who are acting as referrers and that this strange one in that commissions they were paid for just a referral were almost as large as that [for a] mortgage broker doing all the extra [work].”
Indeed, Mr Saadat emphasised that although there is an exemption within the law for referrers, he noted that there is now “a fairly large industry of referrers comprising professionals, lawyers, accountants and advisers who do directly refer consumers to particular lender[s]” and that the commissions paid to these referrers “can be quite significant”.
“In some cases, [they are] as close to the commissions that are paid to mortgage brokers, who are doing more work than a referrer is supposed to be doing,” Mr Saadat said.
ASIC’s senior executive leader for deposit takers, credit & insurers continued: “What they can do under the law is quite limited. I guess there is a risk that some might be going beyond what they are allowed to do under the exemption and that risk is potentially exacerbated by the incentives that are provided by banks. And we have seen cases where misconduct has occurred by so-called referrers and ASIC has taken action against those.
“But, yet, it is a feature of the law, and as a result, there is now an industry of referrers that includes financial advisers and therefore they are paid for that referral.”
The Productivity Commission also asked ASIC about whether financial planners should be given the ability to move into the credit space, to which the senior executive leader for strategy outlined that there seems to be little appetite from planners to offer it.
Mr Kirk said: “Financial advisers can and do provide advice on credit now, and in fact, our regulatory guidance encourages them to in some circumstances… We’re going through at the moment some of our databases to try and get you some data on the level of crossover, but as a broad indicator, it would look to be about 4 per cent licences have a dual licence.”
ASIC on remuneration and changing standards
Touching on the potential of increasing standards for mortgage brokers and potentially changing broker remuneration, the regulator suggested that only small tweaks, rather than drastic changes, would be needed.
Mr Kirk said that when mortgage brokers were first regulated, the standard set was the same as that of the product issuer (i.e. a bank), but he said that “it does seem now that a mortgage broker is [working] to offer customers something more”, such as help with navigating the marketplace. As such, he said that “there is scope to increase the standards expected on mortgage broker”.
However, the strategist argued that “it may be better to start with the obligation that is on [brokers] now and to work in some more specific requirements”, rather than bring in a new “best interests” duty.
Mr Kirk explained: “Typically, there are two elements now of responsible lending; the loan has to be repayable by the consumer given their financial circumstances without undue hardship, but it also needs to meet their needs and objectives.
“And I think often, at the moment, the needs and objectives are only explored in very broad terms [such as] the main need is to buy a house… rather than more detailed needs and objectives about looking for the most competitive loan [a borrower] can get, the best priced one across the market, etc.
“There is something more explicit about what they should be canvassing and addressing in meeting consumer needs and objectives [and there] may be a more direct way to get to this sort of solution.”
Mr Saadat went on to highlight that ASIC’s report for its review into broker remuneration last year suggested “improvements” to the standard commission model rather than fundamentally changing commissions structures, and noted that the “industry has come together and proposed a number of improvements to that standard model” which he believes are “positive suggestions”.
He told the PC: “I suppose one thing to consider is whether you wait for the impact of those to flow through to the market and then assess whether further change is required or whether there is enough evidence now to say that more fundamental change is required to those commission arrangements.
“And for our own purpose, I don’t think we have landed on that position.”
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