Confidential internal documents from the Commonwealth Bank show that the bank sought to reduce the proportion of broker flows from around 45 per cent to “between 20 per cent and 30 per cent” in 2016.
According to an internal Reputational Impact Brief that was raised internally in October 2016, the Commonwealth Bank of Australia (CBA) was actively seeking to reduce the number of accredited mortgage brokers who were either inactive or providing very little business.
The document, which has been published by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, outlines that although CBA had approximately 13,000 accredited brokers at the time, only 1,700 wrote the “overwhelming majority” of its loans.
According to the bank, the lower performing mortgage brokers had both lower conversion rates and higher arrears.
It therefore sought to remove approximately 3,198 mortgage brokers from its accreditation (but only ended up revoking the accreditation of 710 brokers on the basis of inactivity).
The brief reveals that this project was part of a “broader piece of work” that sought to effectively halve the number of brokers writing business to the big four bank.
While outlining that the mortgage broking channel represented 45 per cent of its home loan flows in June 2016, the bank said that it was “seeking to reframe the broker strategy with the aim [of] re-balancing flows from the channel to be between 20 per cent and 30 per cent”.
By March 2017, another Reputational Impact Brief outlined that the bank had approximately 12,000 accredited brokers — one thousand less than just six months before.
This second brief revealed that the decision to reduce broker flows was being driven by “pressure from equity analyst and shareholders to re-balance home loan flows in favour of [its] Proprietary Lenders, where [the bank] make[s] a higher margin”.
Around the same time, the bank reiterated this strategy when The Adviser asked CEO Ian Narev whether the bank was moving away from the broker channel.
This was again referenced in the bank’s most recent half-year results (which also showed that broker numbers still account for 40 per cent of new home loan originations), where it stated: “Our strategic focus on improving the home loan experience for customers continued to drive increased lending through the retail bank’s proprietary channels.”
During the hearings for the royal commission, CBA's executive general manager for home buying, Dan Huggins, clarified: "I think there is a difference between the sales and the proportion. We certainly have a objective to increase the proportion of loans that are coming through the proprietary channels, but I still want to sustain a strong broking channel and, therefore, the sort of dollar sales... I’m comfortable with where they are now but I would like to move the proportions.
"So if I could hold the current level of sales and my broking channel and then grow... the proprietary channel, that would be – you know, that would be part of the objective."
The bank did concede, however, that it would have been better if CBA had not disaccredited brokers purely based on volume, but instead required inactive brokers to undergo more training in order to ensure the quality of their work.
Indeed, at the end of 2017, the bank announced that it would be bringing in new benchmarks for mortgage brokers “designed to lift standards and ensure the bank is working with high-quality brokers who are meeting customers’ home lending needs”.
The accreditation crackdown meant that brokers would need to fulfil more requirements, including having at least two years’ experience and hold “at least” a Diploma of Finance and Mortgage Broking Management. The bank has also since amended the way it segments its accredited brokers, bringing in a new, two-tier system: elite broker and essential broker.
Narev’s “confidential” letter to Stephen Sedgwick
As well as reducing broker numbers, the royal commission has revealed that the bank’s CEO was supportive of changes to broker commission.
The royal commission has now released the full contents of a confidential letter written by outgoing CEO Ian Narev to Stephen Sedgwick AO, as the latter was undertaking his review into retail banking remuneration.
As covered in The Adviser’s sister publication, Mortgage Business, the CBA CEO told Mr Sedgwick that he believed broker commissions were conflicted and suggested extending FOFA to include the mortgage industry.
“As the Reviewer identifies, the use of upfront and trailing commissions linked to volume can potentially lead to poor customer outcomes,” Mr Narev wrote.
He added: “A move to a flat-fee payment would enable brokers to be agnostic towards loan size and leverage. However, consideration is needed on the payment amount, on how to link the fixed payment to an underlying security rather than a product (i.e. to avoid unintended incentives to split loans into multiple fixed/variable products), and on appropriate ‘clawback’ periods to dis-incentivise the churning of loans to maximise broker income.
“A move to flat-fee could also consider the removal of ‘trail commissions’ which can encourage brokers to suggest slower paydown strategies (e.g. interest-only) that maximise broker trail commission income.”
Mr Narev added that any changes to volume-based commissions would also “need to be made uniformly across the industry and across both proprietary and broker channels to eliminate bias and avoid significant market disruption”.
Mr Narev concluded: “We agree with the Reviewer’s observations that while brokers provide a service that many potential mortgagees value, the use of loan size linked with upfront and trailing commissions for third parties can potentially lead to poor customer outcomes.
“Mortgages also sit outside the financial advice framework, even though buying a home and taking out a mortgage is one of the most important financial decisions an Australian consumer will make. We would support elevated controls and measures on incentives related to mortgages that are consistent with their importance and the nature of the guidance that is provided. For example, the de-linking of incentives from the value of the loan across the industry, and the potential extension of regulations such as Future of Financial Advice (FOFA) to mortgages in retail banking.”
[Related: Opinion: Is CBA shorting mortgage brokers?]
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