Fees for service could have ‘perverse impact’: CIF

The CIF’s submission, authored by chairman Anthony Waldron (NAB’s executive general manager, broker partnerships), and deputy chair Mark Haron (Connective’s director), noted that requiring customers to pay a fee would inhibit choice by making access to broker less affordable.

“There may also be unintended consequences that would limit customer access to mortgage broking and affect competition,” the response reads.

“The current model spreads the costs in line with loan size and value. It is possible that if consumers pay directly, those with low loan sizes may face higher fees and therefore will no longer find the broker’s services affordable, pricing them out of the market.

“This could have the perverse impact of reducing access to competition for consumers with complex needs.”

The CIF also stressed that such a model could:

• result in additional direct costs to consumers to access the broker channel;
• put brokers at a significant disadvantage to the lender branch channel (who do not charge direct fees);
• result in “rationalisation of broker numbers, increasing barriers to entry for new lenders, whilst disadvantaging smaller lenders and those without a branch footprint”;
• not correlate to economic value produced by the broker; and
• result in brokers servicing a much narrower band of customers.

The CIF added that there is “little evidence” that there would be any “net savings to customers” under a fees-for-service model.

CIF reforms “a significant step forward”

Further, in its submission, the cross-industry forum also stated its position on other findings and recommendations concerning the broking industry outlined in the PC’s draft report.

In response to the PC’s inquiry into broker commissions and the effect they have on delivering ‘good consumer outcomes’, the CIF referenced its own reform package, noting that steps were already being taken by the industry body to ensure that broker’s worked in a customer’s best interest. 

“We believe the principle adopted by CIF members, to pay commissions based on the funds being utilised by the customer directly addresses the biggest risk to consumers arising from product strategy conflict. Mortgage brokers will no longer be paid on facility limits or have a financial incentive to recommend larger loans that initially have large offset balances.

“The CIF have proposed this principle to promote good customer outcomes, specifically to ensure the appropriate size of the loan for customers and to discourage large initial offset balances. When coupled with the governance framework proposed by the CIF, to be developed through 2018, this is a significant step forward.”

It also highlighted that it had defined what a “good customer outcome” looks like, and is working to implement a new industry code that would apply to mortgage brokers, lenders, aggregators and, where appropriate, introducer / referral businesses and would be subject to all applicable regulatory and competition law approvals.

“We believe introducing the new obligations through an industry code provides a meaningful path for industry and consumers to develop a standard that is fit for purpose,” it said.

Moreover, the CIF emphasised the role that brokers play in increasing market competition, stating that the industry not only provides customers with greater choice, but reduces barriers to entry for smaller lenders that are unable to process loans via a physical branch network.

In relation to the PC’s findings regarding the cost of origination incurred by lenders via the broker channel compared to branch networks, the CIF noted that the PC was not “comparing apples with apples”.

“Brokers are generally more experienced, offer different services and alternate modes of delivery of those services (e.g. at home) as well as offering a different service proposition to that provided by lenders.

“Lenders will incur a distribution cost regardless of whether a loan is sold through a broker or a branch. “

It concluded: “The CIF believes that mortgage brokers contribute positively to competition in the mortgage lending market. Consumers are voting with their feet and continuing to choose to get their loans through brokers in ever increasing numbers. The CIF will continue look to drive change that improves customer outcomes and promote a competitive and vibrant mortgage broking industry.”

[Related: Broker commissions ‘far aligned’ from customer interests: PC]