The broker association has outlined its thoughts on the royal commission interim report, noting that issues raised around remuneration could be “effectively dealt with” through the CIF package of reforms.
On 28 September, the interim report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released.
Totalling more than 1,000 pages over three volumes, the report raised a number of “policy-related issues” arising from the first four rounds of public hearings, which covered consumer lending, financial advice, SME loans and the experiences of regional and remote communities with financial services entities.
The Mortgage & Finance Association of Australia (MFAA) had released an initial response to the report last week, arguing that “the MFAA does not believe there is value in entirely removing the correlation to the economic value which brokers produce in the loans they originate for lenders”.
The association has now released a more detailed response to its members and promoted the work of the Combined Industry Forum.
While the royal commission said that the work of the Combined Industry Forum had been “limited” to date, the MFAA reiterated that the forum was still in its infancy (having been formed off the back of the ASIC remuneration review in 2017) and that some of its proposed reforms were “deliberately” limited in order to “ensure the industry is reforming to solve key issues while retaining competition and consumer choice”.
The MFAA told its members: “The self-regulatory approach the industry is taking through the CIF remains the best way to improve customer outcomes, standards of conduct and culture, while preserving and promoting a vibrant and competitive mortgage broking industry that encourages consumer choice.”
Noting that the royal commission had raised concerns over “value and volume-based remuneration for intermediaries in the home loan industry”, the MFAA said that it believes the issues raised around remuneration and culture “can be effectively dealt with through the specific reforms proposed by the Combined Industry Forum”.
The statement reads: “[O]ne of the key reforms proposed by the CIF, which is in the process of being adopted by lenders, is the guidance to only pay upfront commission on funds drawn down and utilised net of offset, so brokers are not rewarded for encouraging customers to borrow more than they need.
“This directly addresses the ‘product strategy conflict’ inherent in broker remuneration, while focusing on the major product attribute which could be exploited should a broker be influenced by this conflict.”
It added: “The industry has also ceased providing volume-based bonus commissions and campaign-based commissions, and is well progressed in implementing significant soft dollar remuneration reforms aimed at reducing the incidence for both lender choice conflict and product strategy conflicts.”
However, the MFAA argued that “if conflicted remuneration was causing systemic harm to consumers, then the data should show complaints and relative arrears high and rising, competition and consumer support shrinking and prices inevitably rising. But this is not the case.”
It argued that complaints made to the MFAA, the CIO and the FOS about brokers have dropped significantly relative to broker numbers and market share in the past decade.
“When reviewing arrears, ASIC data showed there is no significant difference between the broker channel and the proprietary channel,” the association said.
Touching on Commissioner Hayne’s questions over whether a mortgage broker acts for a borrower or the lender, the MFAA agreed with the report’s view that “a higher customer duty is required to augment the existing legislation” — highlighting the work the CIF is doing to expand the definition of a ‘good consumer outcome” to incorporate a “customer first duty”.
The MFAA also noted that the commission had cited findings that the composition of broker loans were more likely to have interest-only repayments, higher debt-to-income ratios and loan-to-value ratios, but argued that neither ASIC’s remuneration review nor Sedgwick’s review for the ABA had made any findings of systemic consumer harm.
Further, it noted that the royal commission had “not discussed the greater complexity within each demographic that automatically gravitates towards the broker channel”.
“We believe that brokers are not systemically driving customers into risky loans, but rather that complexity gravitates to the broker channel, producing the controlled differences noted by the report. Customers with more complex financial situations seek out brokers to help them secure credit from lenders,” the association said, adding that this trend will continue should banks continue to reduce their risk appetites.
Royal commission is not looking at competition
The MFAA also emphasised that the royal commission’s focus is on allegations and case studies of misconduct (and determining whether or not they are systemic), and has therefore “not prioritised competition, consumer choice and access to financial and credit services for marginalised groups”.
As such, the broker association has said that “many of the questions it has posed and considerations it has suggested would not have taken account of wider potential unintended consequences”.
“We believe that any significant policy changes — particularly in relation to commission structures for mortgage brokers — must hold competition, consumer choice and access to credit services as the highest priority to effectively protect outcomes for consumers,” the association said.
“It will be the government’s role to balance the findings in the interim report with the need to preserve competition and access to credit assistance in the financial services industry as it begins to formulate policy.”
The association went on to say that it would “continue to stress that the broker channel is critical to the health of Australia’s mortgage lending market”.
The MFAA will reportedly be submitting a response to the interim report and “discussing the implications of potential policy decisions with key stakeholders and decision makers within the government over the coming months”.
The MFAA concluded: “We know we must ensure that the strong consumer trust and confidence in the broker channel is underpinned by governance and transparency for the long-term sustainability of our industry, and ultimately, in the service of competition in the mortgage lending market.”
The interim report has also asked members of the public to outline what steps, consistent with responsible lending obligations, a lender should take to verify a borrower’s expenses.
Submissions in response to the interim report can be made on the royal commission website and must be received no later than 5pm on 26 October 2018.
The commission will release a final report, which will include the topics of the fifth, sixth and seventh rounds of hearings (focusing on superannuation, insurance and “policy questions arising from the first six rounds”, respectively) by 1 February 2019.
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