The Finance Brokers Association of Australia has told the Productivity Commission that it “has erred in its approach to assessing the role, function and impact of brokers”.
In its response to the Productivity Commission’s (PC) draft report into competition in the Australian financial system, the association noted that “there is an inference that the role of a broker is to get a lower rate for consumers”. While the FBAA stated that brokers “are able to, and often do, secure better rates for consumers than they could otherwise negotiate themselves, this is just one of many services provided by brokers”.
Indeed, it highlighted that an ASIC survey suggested that just 35 per cent of respondents claimed they used a broker to get a better interest rate or deal.
“By misstating the purpose of a broker, one is then able to go on to suggest brokers are failing, which further allows to suggest the failures are caused by poor disclosure, conflicts and excessive remuneration, which in turn supports recommendations for changes,” the FBAA said.
“Brokers increase competitive pressure making all rates lower for all consumers… There is more competition in the home loan market than there has ever been before and all consumers are the beneficiaries regardless of whether they use broker channels or direct.”
FBAA questions focus on mortgage broker remuneration
Later in its response, the association said that it “believes the Productivity Commission has misunderstood the impact of mortgage broker remuneration”.
“Mortgage broker remuneration and trail commission do not have any bearing on consumer switching,” the response reads.
“Mortgage broker remuneration — both upfront and trail [are] structured to remunerate brokers for the work they perform. Brokers undertake much of the work on behalf of the lender which would normally be done by branch staff and or head offices. In many cases, lenders require brokers to undertake additional work to help the lender discharge their legal obligations.”
The FBAA reiterated that it “strongly opposes” a fee-for-service model, suggesting that while broker remuneration is currently a supply-side cost, a fee would mean the cost would “simply be put onto the consumer on top of the loan cost”.
It also called out clawbacks as being “unquestionably unfair”.
Questions over why mortgage brokers are “singled out”
Further, the association voiced a concern raised by many in the industry as to why the inquiry into competition has had such a strong focus on mortgage broker remuneration.
It said: “The FBAA is unsure why there is such focus on mortgage broker remuneration.
“We were concerned to see statements from the Productivity Commission in the draft report that ‘costs are relatively high’ when assessing mortgage broker remuneration, yet it is unclear what they are relative to.
“There is no suggestion that broker remuneration is increasing rates paid by consumers, and we say there is ample evidence that changing broker remuneration will not reduce rates to consumers.
“Changing broker remuneration will simply destabilise the profession, lead to decreased competitive pressure on banks, increase direct channel conflict (bank branches) and increase product issuer profitability.
“It is not clear why a mortgage broker should be singled out for having to explain in more detail how they go about performing their job. Mortgage brokers are product experts. They know their products and lender criteria.
“Other professions are not required to descend into minute detail about all aspects of their role. Consumers seek out the services of professionals so they do not have to be subject matter experts on everything.
“We do not disagree that some transparency is assistive; however, the distorted focus on the role of a mortgage broker seems entirely misplaced.”
Looking at the draft recommendations, the FBAA was critical of the recommendation that more disclosure requirements were needed. It questioned the logic behind the PC’s observation that “overwhelming evidence demonstrates that few consumers either read or understand terms and conditions for products purchased”, and the draft’s recommendation for more disclosure to be provided.
“Consumers need concise, relevant summaries of the pertinent information rather than detailed disclosure. Consumers do not have an appetite to read lengthy disclosure and in many cases cannot fully understand it,” the response reads.
The FBAA also said that it did not support the need for more reporting requirements around interest rate data, stating that it would “impose a significant reporting burden on licensees”, nor changes to enable financial advisers to provide credit advice, nor the suggestion that ASIC should be made a “competition champion”.
“A competition champion should not be sourced from regulatory bodies. Such a role, even should it exist, must be performed by a broad mix of people with deep understanding of market dynamics and economics,” the broker association said.
It said that it has “no strong opposition to the concept of duty of care obligations being introduced” (and has previously suggested that brokers could be held to higher standards than currently), but it said that a bests interests test would be “a difficult proposition to implement because cost is just one factor when selecting the appropriate mortgage product”.
Instead, the association highlighted the language utilised by the Combined Industry Forum in its reform package.
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