The major bank has revealed some of the difficulties in implementing ASIC’s suggestions for ‘enhancing’ the current standard commission structure for brokers, emphasising that an LVR qualifier could negatively impact first home buyers.
Writing its response to Treasury’s consultation on ASIC’s Review of Mortgage Broker Remuneration, Westpac said that it “supports initiatives that are seeking to encourage and sustain positive consumer outcomes and believes that the commission model needs to be simple and transparent”, but emphasised that the commission structure is “only part of the solution to enhance consumer outcomes”.
Its response reads: “The compliance arrangements and structures surrounding broking practices are equally relevant. Accordingly, steps to change the standard commission model would need to be taken with care to prevent market distortion and unintended consequences.”
The bank also stated that franchise models would also need to be considered when determining any changes to commission structures, as “the franchisee remuneration model is similar to the standard broker industry commission model”.
Tying commissions to LVR 'could deter brokers from acting in FHB space'
Looking at some of ASIC’s suggestions for “enhancing” the current standard commission structure, the bank suggested that incorporating a loan-to-value ratio (LVR) qualifier into the calculations of upfront commission payments would be “highly complex and would not necessarily result in better consumer outcomes”.
Westpac said: “In many instances, higher LVR loans have more complex features and the broker needs to spend more time on structuring the loan. The greater effort involved in assisting consumers with these transactions would not necessarily be reflected in a commission payment based on LVR and may result in the broker being disadvantaged if a lower rate of commission was paid on a particular transaction.”
It continued: “The segment of the market that would be most affected by such a change would be first home owners who traditionally have higher LVRs. Reducing the commission payable on these types of loans may deter brokers from acting in this space, presenting additional challenges for first home buyers.”
The bank went on to outline that developing existing, or implementing a new commission structure, would result in “significant regulatory costs for industry participants”.
Westpac gave the example of aggregator software needing to be “extensively updated, likely at substantial cost” should all Recipient Created Tax Invoice (RCTI) statements need to include the loan LVR ratio against every transaction recorded on the statement (so the aggregator/broker can determine the commission amount that aligns to each applicable LVR).
Industry cooperation needed
Touching on suggested proposals to base the commission payable on loan quality metrics, such as customer feedback and compliance indicators, Westpac highlighted that this “could be difficult to apply” due to such indicators being prone to subjective interpretation and manipulation.
“Different interpretations of loan quality metrics may also result in inconsistent treatment by lenders, potentially leading to market distortion,” Westpac said.
The bank added: “Other options would also need to be carefully considered to determine if they result in any unintended consequences. For instance, a flat-fee commission structure could prompt an increase in split banking as brokers seek to maximise income by submitting smaller deals.”
As such, the bank highlighted that it is important to “ensure [that] a level playing field is maintained across all lenders”.
It stated: “If lenders respond individually, there is a risk that each lender may develop different methodologies for the calculation of commission. This could result in lender choice conflict where a broker may be encouraged to favour/promote the product of the lender that will deliver a higher commission payment.
“First mover disadvantage to changing current commission models would also need to be considered to ensure early adopters of a different commission structure, such as one based on LVR or quality metrics, are not adversely affected.”
It highlighted that it is working with other lenders, relevant industry bodies (such as the ABA and MFAA) and aggregators to determine what may be the appropriate industry-level response for such third-party remuneration recommendations.
“Westpac has appreciated Treasury’s participation in these industry-level discussions,” Westpac said, “and will continue to engage with Treasury as this work progresses.”
Government has said that it will take into account the submissions, including the Mortgage Industry Forum's process, when finalising its response to the review.
Speaking earlier this week, the Minister for Revenue and Financial Services highlighted that mortgage brokers "play an important role" in the home loan process.
Hon Kelly O'Dwyer said: "[D]espite there being a lot of white noise about conflicts, on the whole, ASIC did find that the actual commission structure wasn’t providing a conflict directly for those people who were purchasing their mortgage through a mortgage broker.”
Ms O'Dwyer continued: “In fact, in some instances, because of the additional competition, it was proving to be actually quite valuable.”