Research firm Rice Warner says broker remuneration should undergo FOFA-style reforms and argued for mortgages to be reclassified as financial products in the Corporations Act.
In an article titled Governance of Mortgage Brokers, published this week, Rice Warner slammed aspects of the mortgage broking industry in light of ASIC’s remuneration review, released in March. Submissions regarding ASIC’s findings are due today.
Rice Warner believes the structure and operation of the mortgage market is very similar to that of the financial advice market prior to the introduction of the Future of Financial Advice (FOFA) reforms, and has called for similar reforms in mortgage broking.
“ASIC has made three proposals for the reform of remuneration structures including improving the commission model, and moving away from volume bonuses and soft dollar payments,” Rice Warner said.
“Unfortunately, these proposals do not contain any firm recommendations. They simply defer to the Australian Bankers' Association review into remuneration structures currently underway. We believe that this is insufficient and that ASIC should have articulated firm principles that it expects to be implemented.
“In our view, the principles and provisions established by the Future of Financial Advice reforms in respect of remuneration, and especially conflicted remuneration, should be the benchmark upon which ASIC should be insisting.”
Rice Warner believes “outlawing commissions” should be a consideration, arguing that they “create a poor alignment of interests”. In the absence of lender commissions, the research group says brokers would be able to charge an “establishment fee”, which could be charged at the time of the transaction.
The group was also scathing in its assessment of trail commissions: “Trail commissions make no sense for consumers – imagine what consumers would think if the real estate agent selling a home received a trail commission on the transaction.”
ASIC ‘avoided a significant issue’
According to Rice Warner, ASIC’s review into mortgage broker remuneration has “avoided a significant issue” – the form and quality of advice provided to borrowers.
The group argues that mortgages are almost always associated with the acquisition of a long-term asset – either directly by purchasing a residential or business property, or indirectly by using collateral in a property to invest in other assets.
“In conjunction with their collateral asset, mortgages are equivalent to other long-term investments and require equivalent advice especially in relation to long-term risks. Mortgages are not simple consumer credit products,” the group said.
“We do not consider that brokers can act in the best interests of consumers if mortgages are assessed and advised similarly to consumer credit products with a focus on short term income and expenditure. This is particularly the case given the review’s finding that brokers and lenders did not make sufficient inquiries into consumers’ expenses.”
Further, Rice Warner says that the lack of formal ‘know your client’ obligations that properly recognise the long-term nature of mortgages “is a deficiency that should be remedied”.
“Mortgages are long-term financial commitments that impact on all other long-term financial plans and need to be recognised as such,” the group said.
“Advice regarding the type, structure and term of a mortgage needs to recognise these other long-term financial commitments and aspirations. This is especially the case where the mortgage is used to provide gearing for further investment. To do otherwise would be a failure to serve clients’ best interests."
Rice Warner believes that consumers’ interests would be best served by reclassifying mortgages as financial products in terms of the Corporations Act.
“This would immediately and definitively address the issues related to the levels of remuneration and the conflicts of remuneration,” the company said. “It would also address the quality of advice, the qualifications of brokers, the oversight and disclosure regime, and the need to act in consumers’ best interests. It would also recognise mortgages for what they are, long-term financial instruments, and not simply consumer credit.”
The timing of Rice Warner’s attack on broker commissions is significant, given today’s deadline for submissions on ASIC’s findings.
However, the general view of the third-party channel, as well as professional services groups like Deloitte, is that ASIC’s proposals are a positive development for the mortgage broking community.
“If we look at the ASIC review, the key positive to come out of it was that there is no smoking gun in the broker industry,” Deloitte financial services partner James Hickey told The Adviser.
ASIC has suggested some tweaking to the current model, but found that there would be no systemic changes necessary to how brokers are currently paid.
Mr Hickey said these are “powerful findings” that support not only the role brokers play in the marketplace, but also the role they play in fostering competition.
“If you were an external party looking at the mortgage market in Australia, where half of loans are written by brokers, and you are trying to look at mechanisms that could dramatically change that sector, neither review has identified those or suggested that they need to change,” he said.