The association has told the Productivity Commission that it has “serious concerns” with a statutory best interests duty and that fees for service and the removal of trail would have a negative impact on competition and consumer outcomes.
In its response to the Productivity Commission’s (PC) draft report into competition in the Australian financial system, the Mortgage and Finance Association of Australia (MFAA) outlined the benefits that brokers bring to consumers and the market, and voiced concerns with several of the draft report’s recommendations and findings.
Trail, clawback and fees for service
Looking at broker remuneration, the MFAA disagreed with many of the PC’s draft findings and recommendations in terms of changing the way brokers are paid.
Responding to the call for more justification as to the benefits of trail, the MFAA said that it was “firmly of the view” that payment of trail commissions does not restrict or discourage customer switching or refinancing, as the payments earned via refinancing will generally exceed existing trail, regardless of whether or not it is increasing over time.
The association also highlighted that while trail was originally used to prevent churn, the focus had shifted in recent years to support brokers in servicing the customer over the life of a loan.
Further, it noted that ASIC’s remuneration review did not identify trail commissions as directly leading to poor consumer outcomes; that trail commissions ensure alignment of interests between a lender, aggregator, broker and customer over the life of a loan; and that countries that do not have trail generally have higher upfront commissions.
Touching on clawback, the association agreed that while it “acts as a disincentive to refinance within the clawback period of up to 18 to 24 months”, the likelihood of a product being appropriate and competitive for a customer at the outset, and no longer proving competitive within 18 to 24 months, is “reasonably slim”.
The MFAA also negated the suggestion that mortgage brokers could be paid directly by the consumer via a fee-for-service model, saying that it “remains highly inappropriate for the broker industry”.
“A fee-for-service model would serve to promote the interests of major banks, reduce the number of brokers in the industry and reduce the number of customers able to access appropriate loans,” the MFAA said.
“The MFAA is also of the view that a consumer fee for service would have a negative impact on competition and consumer outcomes for a number of reasons, including that it would create additional direct costs for the consumer. This is particularly relevant for customers who typically cannot afford to pay an upfront fee such as first home buyers, and who — if pushed towards the proprietary channel — could be prevented from securing credit.
“This would only serve to strengthen the position of the major banks rather than drive competition.”
The association concluded: “The current standard commission structure is a reasonable remuneration model that supports a strong and competitive broking industry, and as demonstrated in the ASIC report and the Sedgwick review, has not been identified as driving systemic poor customer outcomes.”
Best interests code
The MFAA also outlined that it had “serious concerns” with any statutory duty of care imposed on mortgage brokers requiring them to act in the best interests of customers.
The association argued that brokers “already have a strong business incentive to act in the interests of customers”, given that a broker’s business is based on the relationship model and is contingent on customer referrals. It added that the imposition of a statutory best interest duty of care would “go beyond the duty of care which is reasonable or achievable in the circumstances”.
The MFAA said that it was “concerned that the proposed legal requirement to act in the best interests of customers has potential to translate into a legal requirement that brokers provide the ‘best’ or ‘most appropriate’ product or advice or to ensure the ‘best outcome’”.
It elaborated: “Such terms, or those such as ‘best available’ product or ‘best possible’ loan, outcome or advice, are not only highly subjective descriptions in mortgage broking, but will require an extensive comparison of products, which is unrealistic given that there can be up to 1,500 products available across 40 lenders on an aggregator panel, which does not necessarily include all lenders and products in the market.”
The association therefore suggested that the current “not unsuitable” statutory benchmark is “more than adequate to ensure that brokers act in their customer’s interest” — especially considering that the general conduct obligations in the NCCP require licensees to act fairly and honestly, and ensure that customers are not disadvantaged by any conflict of interest.
However, the MFAA reiterated that it “supports the continual improvement of standards relating to its industry” and referenced the Combined Industry Forum’s proposals to create an industry code that would hold brokers to the standard of ensuring “good customer outcomes”.
“By introducing these new obligations via an industry code, we believe the CIF will successfully address the concerns associated with the current duty of care obligation in a manner which is effective, and which can be implemented more expeditiously than through legislative means,” the MFAA said.
The association went on to highlight the broker value proposition, which “goes far beyond the provision of lower interest rates as asserted in the draft report”.
The association said: “Although price is a key aspect of the loan, the broker value proposition equates to significantly more than just ensuring that the customer receives a competitive interest rate for their given circumstances.
“Brokers provide a unique combination of choice, convenience, personalised service and advice with the cost of that customer’s introduction paid by the lender.”
It continued: “In an era of increasing product and credit policy complexity, brokers are able to educate and guide customers through the process, reducing the time, stress and administrative burden associated with securing a loan, and assisting the customer to select an appropriate product suited to their financial circumstances and needs.
“Brokers provide customers with wider choice and access to an increased range of products than they would otherwise likely reach without assistance, thus seeking to ensure customers receive a competitive interest rate for their given circumstances.”
The MFAA noted that it is a member of the Combined Industry Forum, which is working on a “landmark reform package” that will “improve consumer outcomes and confidence in mortgage broking”.
The CIF is also expected to submit a response to the PC’s draft report.
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