If brokers “wish to be viewed as professionals”, they should offer clients “as many options as is reasonably possible”, ASIC commissioner Sean Hughes has said.
Last week, the Australian Securities and Investments Commission (ASIC) released its Looking for a mortgage: Consumer experiences and expectations in getting a home loan report as part of a study based off its observations of 300 consumers who were in the process of taking out a home loan, as well as a survey of an additional 2,000 consumers.
The research was designed to examine consumer decision-making in relation to home loans to identify what factors influenced their determination.
According to ASIC, the key findings of its research were:
Following the release of the report, ASIC commissioner Sean Hughes said that lenders, brokers and aggregators “must step up” to make it “easier for consumers to meaningfully compare loan options”, adding that brokers should “communicate how a home loan option has been selected for them
Mr Hughes stated that some consumers were offered loans when “cheaper alternatives” were available, and stressed the need for greater price transparency.
The commissioner spoke to The Adviser following the release of the report to shed light on some of the concerns raised by industry stakeholders with respect to the findings.
With regards to objections to a perceived suggestion in the report that the cheapest interest rate equates to the “best” loan, Mr Hughes said the findings have highlighted the need for consumers to outline their needs and objectives to a broker to ensure they receive the appropriate service.
“What we’re suggesting consumers need to do is better state upfront to their broker what they’re looking for,” he said.
“If their primary purpose is to secure the cheapest possible cost of the loan, then they need to say that to the broker and say, ‘I want you to shop around, find me several options at the bottom end of the market from a cost point of view’.
“If on the other hand, the customer wants to have other product features, [then] they need to be upfront about that as well.”
Mr Hughes claimed that if consumers expect to receive the cheapest interest rate possible, brokers should provide them with more options.
According to the ASIC research, 58 per cent of consumers were offered one or two loan options by their broker. However, Mr Hughes suggested that rather than slimming down options for consumers, they should be offering them with a wider pool of choices.
“If brokers wish to be viewed as professionals, and that’s exactly what I think they should aim to be viewed as, then in the case of any professional giving advice or options to a client, the more [options] you can give, the better,” he said.
“If it’s only two, that’s not really much of a choice, and even worse if it’s only one.”
The ASIC commissioner acknowledged that there may be circumstances in which brokers can only offer one or two options, but said that all things equal, brokers should provide borrowers with as many alternatives as they can.
“There may be reasons why the broker can only secure one or two options because of the borrower’s particular circumstances [and] arguably the broker may struggle to find more than one or two options,” he said.
“But in the ordinary course of events, if [the] customer has no unusual features and there are a range of options available to them, we think the broker should put as many options as is reasonably possible in front of the customer so they can make a genuine choice.”
In its qualitative research, ASIC discussed with consumers their understanding of how mortgage brokers are paid, including their recollection of any discussions with a broker.
ASIC found that consumer understanding and perception of commissions “varied considerably”, adding that in instances where consumers were aware that a broker received a commission payment, it was “not always clear” they understood that a broker is likely to receive different commission payments based on the lender selected, and that this “presented a conflict of interest”.
In its report, ASIC also stated that some consumers suggested that brokers may be “pushing” some loans based on the commission received from the provider.
Reflecting on such findings, Mr Hughes observed: “I think the other issue is that customers appear to us, based on the research, to be a little uncertain about the remuneration arrangements.
“Although there seems to be an understanding that where it was a broker-originated loan, brokers were receiving a commission from the lender, there was still an expectation on the part of the customer that the broker would act in their best interests.
“Unfortunately, some of the stories that we encountered through the process would suggest that where only one or two options were presented to the customer – in particular when the customer was disappointed with those options and felt they could get a better deal going directly – [it] would seem to us that there needs to be a different conversation about what is the benefit of the remuneration a broker is getting and how the current remuneration structure deal with the customer’s expectations.”
However, Momentum Intelligence’s Consumer Access to Mortgages Report, which involved a survey of 5,782 consumers, found that 78.6 per cent of consumers have no concern regarding the current remuneration structure in the broking industry.
ASIC findings to ‘support’ best interests duty
Mr Hughes also welcomed the timing of the release of ASIC’s report, which was published just days after the federal government introduced its National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019.
The bill contains a new bests interest duty obligation on mortgage brokers, as recommended by commissioner Kenneth Hayne in the final report of the banking royal commission
“I think the report is very timely because what it does do is provide a factual objective piece of research, which supports the government’s proposed reforms in relation to the introduction of a mortgage broker best interests duty,” Mr Hughes said.
“We weren’t aware that the government was going to make the announcement it made earlier this week, but as it turns out, it’s useful to have some empirical data.”
The ASIC commissioner added: “We think the data stacks up and tells a very interesting story about the different experiences between those customers who use a broker and those who go directly to a lender.”
The consultation period for the draft best interests duty is currently open and will close on 4 October.
The new provisions are scheduled for implementation by 1 July 2020.
Charbel Kadib is the news editor on The Adviser and Mortgage Business.
Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.
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