The Australian Department of Treasury has told the financial services royal commission that there is a lack of evidence showing that consumers are being harmed by vertical integration.
In a background paper to the financial services royal commission, the Department of Treasury agreed with a recommendation made through antecedent inquiries, such as the Financial System Inquiry and ASIC's review of broker remuneration, that lender-owned aggregators and brokerages should be transparent about their ownership to customers.
However, Treasury believes that while there are "risks" with vertically-integrated models, there is limited evidence to show that consumers are being harmed by vertical integration.
Touching on ASIC’s findings that lenders’ shares of the flow of vertically-aligned aggregators were “substantially higher than their overall share of brokered home loans” when there was also a white label arrangement in place, the department suggested that these findings "point to a risk that brokers working under vertically integrated aggregators may recommend specific in-house loan products that may not provide the best outcome for a consumer".
"Again, they are also suggestive of a potential negative effect on competition in the mortgage market at the expense of customers more generally,” it said.
However, it claimed that “the case for requiring aggregators to be independent of lenders does not appear strong”, even suggesting that structural separations between lenders and their subsidiaries could be “complex”, “disruptive” and “have unintended consequences”.
“Our judgment — subject to evidence in future hearings — is that structural changes in the industry (reflecting decisions both by firms and the recent shift of advisers away from the largest vertically integrated firms), recently introduced or soon to be introduced reforms and other potential reforms the commission could recommend, and heightened attention by firms and ASIC to the problems that have been identified, should be sufficient to mitigate the misconduct risks involved — subject to further ongoing scrutiny by regulators,” Treasury stated in its background paper.
The government department acknowledged that lenders have been divesting their interests in aggregators and brokerages lately, referencing Commonwealth Bank’s decision to demerge its wealth management and mortgage broking businesses, including Aussie Home Loans, into a separate entity that will “pursue its own growth strategies”.
The major bank’s CEO, Matt Comyn, described the bundled spin-off as a “clean and timely exit”, adding that the demerged entities have a better chance at success outside the Commonwealth Bank Group.
The Treasury’s background paper also mentioned Macquarie Group, which has sold down its stake in Yellow Brick Road from 18.4 per cent in April to 5.15 per cent in May.
It has previously been suggested, including by outgoing Productivity Commission chair Peter Harris, that bank-owned aggregators control about 70 per cent of the mortgage broking market.
In its draft report into competition in the Australian financial system, the Productivity Commission said that “clear conflicts of interest created by ownership” are “inherent” in the mortgage market, further claiming that lenders are wielding “significant influence” over aggregators and called for a “clear legal duty” to be imposed on aggregators and the brokers that fall under them.
While in support of disclosures, Treasury said that disclosing ownership structures to borrowers “should not be expected to have a significant impact on market share”.
Treasury recommended that ownership disclosures be extended to white label arrangements and separate-branded banks operating under a single licence such as UBank, Bankwest and Bank of Melbourne.
The government department was not in full favour of introducing a best interests duty for lender-owned aggregators and brokerages, akin to the one used in the financial advice sector, suggesting that applying a positive duty to brokers would not “necessarily be best achieved by attempting to replicate the financial advice best interests duty, given differences between brokers and financial advisers, and the existence of responsible lending and other obligations”.
Treasury therefore advised that if one were to be introduced, “careful consideration would again need to be given to an approach that mitigates conflicts of interest risks while avoiding unnecessary compliance costs, and to what extent it can rely on industry efforts or providing ASIC with some discretion or rule-making power”.
Treasury was also unconvinced that there needs to be an overhaul in how mortgage brokers are remunerated.
It acknowledged the findings of ASIC’s review of broker remuneration, including that home loans arranged through a broker may be larger, have higher arrear rates and loan-to-value ratios and more likely to be interest-only loans.
However, Treasury stated that the differences could reflect “the difficulties in statistically controlling for differences between brokered and direct channels, as well as brokers achieving outcomes actively sought by customers”.
“These average differences are prima facie not so significant that they provide compelling evidence of major problems that require a wholesale change to the existing standard commission structure given the industry reforms currently underway,” the Treasury’s background paper stated.
Earlier this year, regulators and industry bodies pointed out the lack of publicly available data on the mortgage broking industry. For example, Peter White, FBAA executive director, previously said that he believes the banks have not been forthcoming with their data, making it difficult for regulators to have an accurate picture of the broking industry.
“The Productivity Commission referred to [the cost data] as ‘a black box’ that no one can get to. But that information should be readily available. So, the question is why. Truth comes through transparency and if you get that transparency right, you get people’s trust,” Mr White said.
Mike Felton, MFAA CEO, said that the data gap is being addressed through the Combined Industry Forum’s (CIF) reform package, which includes disclosures around ownership and influence, as well as “a new public reporting regime where lenders, aggregators and brokers will both publish and provide additional data to ASIC to enable customers to make more informed decisions when choosing a channel, aggregator or broker”.
Treasury also acknowledged that the broking industry, through the CIF, has been taking steps to introduce changes to broker remuneration that aim to improve the commission structure.
“The CIF proposals are positive developments which Treasury welcomes. Whether the adoption of these reforms by individual firms is sufficiently widespread and remains in place will need monitoring, as will the risk of other arrangements being developed to replicate the discarded elements under a different form or name,” the background paper stated.
Tas Bindi is the features editor for The Adviser magazine. She writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.
Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business.
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