Broker-originated loans are refinanced at “more than double” the rate of direct-channel loans, the major bank has revealed in its new submission to the Productivity Commission.
In its second submission to the Productivity Commission (PC), released on Wednesday (21 March), the National Australia Bank (NAB) stated that it has found “no evidence” which suggests that the payment of trail commission has limited “switching” for broker-originated loans.
The big four bank responded to draft finding 13.1 of the PC’s draft report, which alleged: “The payment of trail commissions creates perverse incentives for brokers by rewarding them for keeping customers in their existing loan. Broker loyalty appears skewed towards the institution, not the customer, and thus likely discourages refinancing.”
In its submission, NAB noted that in the 2017 financial year (FY17), switching was more prevalent among borrowers with broker-originated loans.
“NAB has no evidence that incidence of switching is lower for mortgage broker-originated borrowers compared to those originated via direct channels,” the submission reads.
“In fact, refinance out rates for NAB’s mortgage broker-originated loans was more than double the rate of direct channels in FY17.”
The submission echoed the views put forward by NAB COO Anthony Cahill in his address to the PC on 5 March, stating that brokers are, in fact, rewarded for refinancing a client’s loan.
“[If] a broker were to assist a customer to move the loan to another lender, they would cease receiving a trail commission from the incumbent, but earn upfront and trail commission from the new lender.”
NAB highlighted the work the Combined Industry Forum was doing to improve commission structures and raise standards.
NAB concerned over “best interests duty”
The PC has also suggested that the Australian Securities and Investments Commission (ASIC) could impose a legal duty of care obligation on brokers and called for increased broker disclosure requirements.
In its submission, NAB said that a best interests duty “may be difficult to achieve practically” as “both mortgage products and customers themselves are not homogeneous and price is not the sole determinate of a good customer outcome”.
NAB added that it was “concerned” that applying a legal best interests duty only to brokers operating under lender-owned aggregators would create an “uneven playing field”.
The bank reiterated that bringing in a fee for service would be “detrimental to competition in the mortgage market” as it would see brokers “become unaffordable for customers”.
NAB also pointed out that proposals have already been put forward by the Combined Industry Forum (CIF) to improve broker and aggregator transparency.
The major bank also said that it does not believe the publication of median interest rates would benefit consumers, as it would “create unreasonable expectations, whereby all consumers anticipate receiving an interest rate at or below the median”.
“There are legitimate, risk-based reasons for customers to receive a price that is above a median rate; for example, high-risk loans require significantly more capital compared with low-risk loans, necessitating a different price strategy,” the major bank said.
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