Introducing an industry standard commission paid to brokers irrespective of the lender would help remove perverse incentives, a regional bank has told the financial services royal commission.
In its response to the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Suncorp Group has said that the “introduction of a system of standardised payments to brokers” may remove incentives that “could cause bias” among brokers for lenders with higher upfront and trail commission rates.
“Brokers could be paid an industry standard percentage or fixed amount for each loan (of the same type; for example, owner-occupier or investor, lower or higher loan-to-value ratio) brokered by them irrespective of the lender,” Suncorp said.
“This would remove the possibility of brokers being incentivised to prefer the bank which paid the highest commission and instead provide a simple, transparent system of broker commissions that is easy for customers to understand.”
Further, Suncorp has submitted that the introduction of “tiers or caps” in a standardised commission model could address the “problem of some brokers recommending unsuitably aggressive borrowing”.
However, Suncorp added that such a move “would need to be carefully considered in order to avoid unnecessary complexity”.
Extension of NCCP obligations
Moreover, in its submission, Suncorp claimed that another way to help ensure that brokers do not recommend loans that are “unsuitably aggressive” would be to extend obligations under section 133 of the National Consumer Credit Protection Act (NCCP) to mortgage brokers.
Section 133 of the NCCP prohibits lenders from entering borrowers into “unsuitable” loan contracts and holds civil and criminal penalties for breaches of the obligation.
Suncorp claimed that extending the obligation would “weed out or deter” irresponsible brokers who facilitate fraud.
“Such a reform, if properly implemented and enforced, would have a minimal impact on the majority of responsible brokers (who already ensure that their clients do not take out unsuitable loans), whereas it may weed out or deter the minority of unscrupulous or irresponsible brokers who facilitate fraud by borrowers or place their clients in unsuitable loans,” the bank added.
Suncorp backs commission-based model
Despite proposing reform to the broker remuneration model, Suncorp expressed support for the existing commission-based arrangement.
In his interim report, Commissioner Kenneth Hayne has claimed that lenders paying value-based upfront and trail commissions “might” be in breach of section 47(1)(b) of the NCCP.
Section 47(1)(b), which states that licensees must “have in place adequate arrangements to ensure that clients are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by the licensee or its representatives”.
However, in response, Suncorp stated that any proposal to remove commissions altogether and to transition to a “flat fee” or direct “borrower pays” model is “likely to render the mortgage broking industry unviable, either in whole or in substantial part”.
“This would not be in the best interests of consumers,” the bank said.
“Responsible mortgage brokers perform a key role in facilitating competition (thereby exerting downward pressure on the price of home loan products) in the face of the relative market dominance of the big four banks.”
The non-major bank noted that brokers provide “expertise, convenience and choice” for borrowers in navigating “the largest financial commitment that most Australian consumers will make”.
The bank added: “Brokers can ameliorate the information asymmetry and bargaining power imbalance which can exist between borrower and bank.
“At present, there are approximately 17,000 mortgage brokers operating in the Australian financial services market. These mortgage brokers facilitate 55.7 per cent of all residential mortgages written in Australia.
“While the vast majority of consumers consider that mortgage brokers provide a valuable service, many consumers are unwilling to pay upfront for financial advisory services of that kind.”
The major banks have also backed the current broker remuneration model in their response to the royal commission’s interim report.
The big four banks voiced their support for the Combined Industry Forum’s broker remuneration reform package, arguing to the royal commission that the “existing model for mortgage broker remuneration is not inherently problematic”.