The final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been released, which calls for a radical change to broker remuneration.
In his 1,000-page final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which was handed to the Governor-General on Friday (1 February) and publicly released today (4 February), Commissioner Kenneth Hayne reiterated his concerns from his interim report regarding broker remuneration arrangements that “might” be conflicted and warned that lenders that pay value-based commissions to brokers may be breaching their obligations under the National Consumer Credit Protection (NCCP) Act.
In the final, three-volume report, the commission has therefore recommended a change to broker remuneration. Commissioner Hayne has recommended that commission should be paid for by the consumer.
The final report reads: “The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.
“Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.”
Commissioner Hayne continued: “Value-based commissions paid by lenders to mortgage brokers are a form of conflicted remuneration. That is, value-based commissions are a form of remuneration that can reasonably be expected to influence the choice of mortgage, the amount to be borrowed and the terms on which the amount is borrowed.
The commissioner also called for changes to trail: “The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing. Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come? It cannot be that they are deferred payment of fees earned earlier when the amount paid as trail depends upon the length of the life of the loan.”
The Commissioner noted the work being undertaken by the Combined Industry Forum (CIF) to adopt a new remuneration structure where commissions are paid on draw down amounts, net of offset in a bid to reduce perceived conflicts of interest.
However he noted: "[T]he reforms proposed by the CIF would not alter the basic structure of brokers’ remuneration – lenders paying value-based upfront and trail commissions in respect of loans made. It is those elements of the structure that drive poor customer outcomes...
“So long as brokers are seen by borrowers to be acting on their behalf, the problem that present remuneration arrangements are conflicted remains unsolved by the remuneration changes proposed by the CIF,” Commissioner Hayne said.
“I therefore recommend steady but deliberate movement towards changing the existing remuneration arrangements for brokers, so that the borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending," he said.
According to Commissioner Hayne, changes in brokers’ remuneration should be made over a period of two or three years.
"I would begin with trail commissions," he said. "There should come a time within about 12 or 18 months (no greater precision is possible) when lenders are prohibited from paying trail commission to mortgage brokers in respect of new loans. Existing trail commissions would stand unaffected.“
He continued: “Why not regulate mortgage brokers in precisely the same way as any other person who is to provide personal advice to a retail client? Why not treat mortgage brokers as financial advisers? I know that doing this would bring with it the requirement to provide written statements of advice. I know that it would bring with it the educational requirements expected of other financial advisers.
"But what reasonable answer can be given to the observation that the special and distinct treatment of mortgage brokers is no more than yet another carve-out from, or exception to, generally applicable rules stated in the law because they are seen as necessary to the proper conduct of provision of financial services in Australia? None is evident to me.
“I consider that after a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients,” the report reads.
Commissioner Hayne continued: “When mortgage brokers are no longer paid by lenders, it may well be that lenders dealing directly with borrowers should be required to charge a fee to recover the costs that would be avoided if the loan were to be originated through a broker, but which are incurred if originated directly. This would be in order to prevent lenders competing unfairly with brokers.”
The commission suggested that a Treasury-led working group should be established to monitor the changes and make adjustments as necessary.
That group should include representatives of the ACCC and APRA.
According to Commissioner Hayne, the working group should pay particular attention to:
• the effect of the changes on interest rates;
• the effect of the changes on competition between lenders;
• the effect of the changes on competition between lenders and brokers; and
• developments in the residential mortgage market that mean that the changes that [he has] proposed should be re-evaluated.
Banks may also need to charge fees
However, while the royal commission has suggested that borrowers should pay a fee for broker services, it has also noted that in order to create a level playing field between banks and brokers, banks should be required to charge a fee to direct customers "based on the costs that are incurred by the bank when there is no broker".
He said: “I recognise that suggesting that banks charge an additional fee will be difficult for some to understand. But, if brokers are to charge a fee for their services, then it may be necessary for the purposes of maintaining competition, for banks also to be required to do so when directly originating a loan,” he noted.
“The fee should reflect no more than the costs incurred by the bank when originating a loan without the assistance of a broker. If only brokers end up charging a fee, customers may cease to use their services, which would eliminate any potential benefit that brokers can have on competition in the residential mortgage market. Both the fee charged by the broker and the fee charged by the bank should be able to be capitalised into the loan.
“Although I have explained what I think may well be necessary in order to create a level playing field, this is a matter that ought to be considered by the Treasury-led working group and should form part of their consideration of the effect of the changes on competition between lenders and brokers,” he said.
Many in industry had expected the commission to make such a recommendation on changing commissions (particularly given its commentary during the royal commission hearings), but not to this extent.
Many had hoped that the commission would call for more qualifications of why commission was being paid, rather than a wholesale change.
It is a notable conclusion to reach given that the ASIC Review into Broker Remuneration did not find any systemic problematic issues with the broker remuneration model, and, indeed, the Momentum Intelligence Consumer Access to Mortgages Report shows that nearly 80 per cent of borrowers do not have an issue with the way brokers are paid.
Depsite work that was undertaken by the industry to demonstrate to government the dangerous ramifications of banning the current structure, with many aggregators, associations, broker groups and individual brokers meeting with politicians and several reports being released to forecast the consequences of changing the lender-pays model to a consumer-pays fee for service – Treasurer Josh Frydenberg has announced that government will ban trail commissions next year and would look at “a further review in three years on the implications of removing upfront commissions and moving to a borrower-pays remuneration structure”.
The move to a consumer pays model could be devastating to industry.
In the recent Consumer Access to Mortgages Report from Momentum Intelligence, it was found that while the vast majority of borrowers are satisfied with their mortgage experience when using a broker, most would be unwilling – or unable – to pay a fee for their service.
Nearly two-thirds (58 per cent) said they would not be willing to pay a broker a fee.
While two-fifths of respondents said they were willing to pay a fee, the vast majority were only willing to pay a nominal fee. Just 11 per cent said they were willing to pay a maximum of $1,000 for a broker’s service, while 3.5 per cent would pay up to $2,000 and only 1 per cent would pay up to $5,000.
A common theme uncovered from the responses was that while borrowers prefer to use a mortgage broker, they would be unable to afford to pay a fee-for-service if it were mandated.
Given the findings of Momentum Intelligence’s Consumer Access to Mortgages Report, a fee-for-service model would therefore restrict the ability of borrowers to access mortgage brokers, restrict the access to lenders without a branch presence, reduce competition in the mortgage marketplace and potentially hand back power to the major banks.
Find out more about what the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry means for the broking industry, and what the next steps are, by attending the Better Business Summit 2019.
Running across five different states every Thursday from 14 February, the Better Business Summit provides brokers with straight-talking, practical advice to help them grow and improve their businesses in this time of change.
Tickets are selling out – so make sure you secure your ticket today to stay ahead of the curve and prepare your business.
Annie Kane is the editor of The Adviser magazine, Australia’s leading magazine for mortgage brokers.
As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also the host of the Elite Broker podcast and regulator contributor to the Mortgage Business Uncut podcast.
Before joining The Adviser team at Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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