A senior executive leader at ASIC has clarified what he believes "good consumer outcomes" look like, and shared his thoughts on the clawback conundrum and his own experience of using a broker.
In an interview with The Adviser, Michael Saadat, ASIC’s senior executive leader for deposit takers & insurers & credit services, spoke about the regulator’s review into broker remuneration, highlighting that it was the “first time that any regulator or anybody ha[d] really looked at the impact of remuneration structures on consumer outcomes and competition”.
The review, which analysed “about 150 fields of data for about 1.5 million home loans” over the period 2012–2015, culminated in 13 findings and six proposals — including that standard commissions should be “improved” so that brokers “are not incentivised purely on the size of the loan”.
The Adviser asked the senior ASIC executive why the review did not make any proposals on changing clawback commissions.
Mr Saadat said: “We did not look at whether clawbacks are a good thing or a bad thing. And it’s not something that we were able to really look at as part of this review… it’s difficult because you can see the arguments on both sides.
“I think the issue of clawbacks being designed to reduce the risk of churning is the argument that lenders would give. On the other hand, you’ve got a situation where some consumers might refinance their loan and that had nothing to do with the broker and suddenly the broker is having a situation where their commission is being clawed back.
“There are definitely arguments on both sides, and this is an issue that’s not just in broking; it’s certainly a live issue in other parts of the financial services industry, like the life insurance industry.” (Earlier this year, ASIC released its legal instrument which set commissions caps and clawback amounts for the life insurance industry, in a bid to “reduce the incentives for advisers to provide inappropriate advice to clients”.)
Mr Saadat concluded: “Certainly, we did not recommend that [broker] commissions be banned; we came out and said that certain types of commission are concerning, like volume-based incentives, bonuses and soft dollar. But on the standard commission model, we said we think it can be improved.”
Good consumer outcomes can ‘vary’
When asked by The Adviser to provide more detail on what ASIC believes a "good consumer" outcome is, Mr Saadat noted that while brokers are legally bound to provide consumers with “not unsuitable” loans, ASIC had been told by brokers that “they do go beyond the legal minimum requirement in many cases and they’re always trying to get the best deal for the consumer”.
Mr Saadat continued: “I think, for brokers, it’s really about understanding what the consumer’s needs and requirements are, recommending the product that meets those needs and requirements, and documenting that, so you are able to demonstrate how you have gone about doing that.
“If we’re talking not about the law, just more generally, I think a good consumer outcome is one where you take the individual borrower’s circumstances and you get information from the consumer so you can then form a judgement on what would be a good product for that consumer.
“So, for a consumer who might be ‘non-vanilla’ (and many traditional lenders find it difficult to provide a loan in that situation), a good consumer outcome in that situation would be finding a lender that can provide a loan in that situation, and provide a loan that the consumer can afford, and has the features and characteristics that the consumer is looking for.”
However, Mr Saadat acknowledged that "good consumer outcomes" can vary from case to case. He explained: “You might have an existing client who has a home loan and is looking at refinancing. A good consumer outcome in that situation is presumably understanding why that consumer wants to refinance. Is it because they want a better rate? [If so], a good consumer outcome in that instance would be putting a consumer into a loan with a better rate.
“We have seen examples where consumers are refinanced into higher rates and you could ask the question: How can that be a good consumer outcome? But, I guess, it could be, if the consumer was looking for a refinance not based on rate. It really does vary consumer to consumer. And I think that’s what brokers would say that they are there for. To understand their individual clients' needs and objectives.”
Using a broker ‘was a great experience’
Although the senior executive leader said that ASIC has not “directly spoken to individual consumers”, it is planning on doing a shadow shopping exercise in this financial year.
He added, however: “Some of the findings are that consumers are generally happy with the broker’s service proposition; they like the help they get from brokers, [and] satisfaction levels are pretty good.”
Indeed, Mr Saadat told The Adviser that he had recently used a mortgage broker to refinance his home loan. While he did not reveal who his broker was, he said that “it was a great experience”.
“It really handled all the discussion with the lender and just made it easier for me to do the whole process without having to be as hands-on as I otherwise needed to be.”