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‘No evidence’ that commissions result in poor customer outcomes

by Reporter12 minute read
Poor rating, commissions result

Smartline has told the royal commission that there is “no direct evidence” that commissions lead to poor customer outcomes and that some submissions “ought to be treated with caution”.

The broking group made the warning in response to the closing statements made by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Smartline, which was the only broking group not owned by a bank to appear at the hearings*, told the commission that it did not believe there was adequate evidence to justify a radical change to broker remuneration.

After emphasising that review of mortgage broker remuneration last year did not conclude that the upfront and trail commissions have detrimental impacts on consumers, and highlighting the reforms announced by the Combined Industry Forum, Smartline’s lawyers argued that there was “no direct evidence” that volume commissions (including upfront and trail commissions) lead to poor customer outcomes.


The broking group said that it was their experience that commissions “do not have that effect” and that “the incentives affecting brokers’ behaviour do not in and of themselves promote poor customer outcomes, as appears to be assumed by the assignment of the epithet ‘conflict of interest’”.

It added that while there have been suggestions that broker commissions are conflicted, while “it is the case that a broker will earn more from a larger loan, and earn more from a lender which pays a higher rate of commission, the mere existence of this remuneration structure does not demonstrate the existence of an intractable conflict”.

The submission continued: “This is no more the case that, for example, would arise in respect of professions in which fee earners are paid by the hour. While this fee structure has the result that the longer spent on a particular task the higher the fees, it is not assumed that anyone paid by the hour will draw out every task unnecessarily for the self-interested purpose of generating more fees.”

Further, Smartline provided details of the commission rates and loan volumes of its top 20 lenders from the past three years, which show “there exists no correlation in the data between the level of commission paid by the lender and the volume of loans directed by brokers to that lender”.

It further said that the conflict of interest suggestion “wrongly assumes that brokers are cognisant of the (small) differences between commission rates offered by lenders”, highlighting that loan software used by brokers provides options for customers based on their “needs, objectives and financial situation” and does not take into account commission paid.

Echoing concerns raised by NAB, the broking group added that some submissions to the commission also “ought to be treated with caution” as they often failed to produce evidence upon which they based their opinion and their conclusions “have not been tested in evidence”.

Further, it outlined that while the RC may have heard evidence regarding a small number of instances of misconduct by specific brokers, it did not hear any evidence about what caused those brokers to engage in misconduct.

“While some broker misconduct may well be motivated by a desire to obtain financial advantage… the more prevalent motivation appeared likely to be the broker’s overzealous pursuit of the customer’s stated objectives,” the submission said.

Noting some of the individual cases of misconduct that Smartline identified during the hearings, the broking group said that while it was not arguing that these cases were not serious, it argued that “these cases did not appear to be caused by the existence of a particular remuneration model”.

Touching on the call for more information about a potential move to an upfront fee, Smartline said that there should be “extensive consultation with all stakeholders” about how this would work in practice, and who would be responsible for paying the fee (i.e. the consumer or the lender, or both).

It added that theoretical or latent conflict is “a ubiquitous feature of capitalist enterprise” when considering the balance between “a business’ desire to make money and its customer’s desire to be well served”.

The group, therefore, argued that there is not “any evidence before the commission to suggest that there is a basis for intervening in the market in the manner suggested”.

“The evidence presently before the commission is not apt to answer this question, nor does it provide any proper foundation upon which the commission could move to interfere with current commercial arrangements.”

It added: “The CIF’s reforms constitute effective measures to address conflict and misconduct while preserving competition in home lending.

“As a result of these reforms, the mortgage broking industry which the commission is reviewing today will be different from the industry which will exist by the end of 2020.”

*This article was updated on 11.04.2018 to reflect that Smartline was the only broking group to give evidence that was not owned by a bank. Representatives from CBA-owned broking group Aussie also appeared.

[Related: Major banks outline thoughts on flat-fee model]

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