Former ASIC chair condemns broker commission ban

“You have to balance competition with consumer protection,” he told academic Justin O’Brien as part of The Trust Project and the AFR.

“Mortgage brokers have brought a lot of value to competition to Australia… This [recommendation to ban commissions] is absolute rubbish. It is so anti-competitive.”

Mr Medcraft, who was the former chair of the Australian Securities and Investments Commission (ASIC) and was at the helm of the regulator during its Review of Mortgage Broker Remuneration, additionally denounced commissioner Hayne’s suggestion to introduce a borrower-pays broker remuneration model.

He has previously stated that he believed brokers deliver "great consumer outcomes".

He joins a long line of critics to warn of the adverse consequences of banning lender-paid broker commissions and introducing a borrower-pays model, such as the probability that it would stifle competition in the mortgage market and drive cash-strapped customers into banks with sizeable branch networks.

The widespread condemnation by the industry played a role in the major political parties backpedalling from their initial commitment to implement commissioner Hayne’s 76 recommendations.

Following campaigning and lobbying efforts by the broking industry, the Liberal Party announced that, if re-elected in the next federal election on 18 May 2019, it would look at reviewing the impacts of removing trail in three years’ time rather than abolishing it next year as originally announced, while the Labor Party proposed that lenders instead pay brokers a standardised upfront commission as a proportion of the loan amount. It suggested that commissions be capped at a fixed rate of 1.1 per cent.

Mr Medcraft was also reportedly critical of commissioner Hayne’s suggestion that ASIC should litigate more often. In the final royal commission report, the commissioner concluded that “the law was too often not enforced at all, or not enforced effectively”, calling out ASIC and APRA for rarely taking corporate wrongdoers to court.

One of his final recommendations was that when ASIC is considering any legal violation, it should ask the critical question, “Why not litigate?”

While the OECD senior official expressed that timely action is needed to deter misconduct in the financial services sector, he disagreed that more litigation would be effective as it would slow ASIC down, according to media reports.

“You have to look at this holistically because it is no use giving the regulator more penalty powers if the courts are not equipped to deliver timely and effective results,” Mr Medcraft reportedly said.

Earlier this month, the federal government revealed it allocated $35 million in extra funding in the 2019-20 budget for the Federal Court of Australia to consider prosecutions for breaches of corporate law. The funding boost would allow for the appointment of additional judges and registry and support staff, as well as the construction of new court facilities.

In a joint announcement last month, Treasurer Josh Frydenberg and Attorney-General Christian Porter, said: “Referrals arising out of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and increased enforcement activity as a result of the Australian Securities and Investments Commission’s shift to a ‘why not litigate’ approach are expected to give rise to more criminal prosecutions.

“As such, the Coalition government is going beyond the recommendations in the final report to provide additional capacity within the Australian court system to allow matters to be heard and penalties for criminal breaches of the law to be handed out faster.”

According to the Liberal government’s 2019-20 budget, $640 million had been designated to ensure financial system regulators have appropriate resourcing to effectively deliver on their expanded responsibilities, enforcement and supervision, as recommended by commissioner Hayne.

This includes $400 million to ASIC for an “accelerated” enforcement strategy and enhanced onsite supervisory capability.

The funding boost followed on from the passage of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 in Parliament in February, which allows ASIC to impose harsher criminal and civil penalties for corporate and financial sector misconduct.

The Adviser has reached out to the OECD for further comment.

[Related: ‘Brokers deliver great consumer outcomes’; ASIC chairman]