A shadow shopping exercise being undertaken by ASIC will consider whether “broker advice” results in “positive consumer outcomes”, according to the financial services regulator.
After the Australian Securities and Investments Commission’s released its report into broker remuneration last year, Michael Saadat, ASIC’s senior executive leader for deposit takers, insurers & credit services, told The Adviser that the commission would be undertaking a shadow shopping exercise in this financial year.
The shadow shopping of brokers, thought to include the experiences of hundreds of broker clients, aims to understand the inputs and advice given to mortgagors.
In an update this week, Mr Saadat said: “While broker remuneration practices may have an impact on home loan choice, ASIC recognises that a range of other factors influence which home loan products are purchased, and that the purchase experience may vary across purchase channel (i.e. via broker compared to directly from a lender).
“As part of our ongoing review of mortgage broking practices, we are undertaking consumer and broker research to better understand the home loan purchase process, particularly to determine what factors (beyond broker commission) affect how and which home loan products are purchased, and whether and how consumer outcomes could be improved.”
Defining ‘good consumer outcomes’
The shadow shopping exercise follows on from the review into broker remuneration, which brought to the fore a new concept of ensuring that brokers are helping to deliver “good consumer outcomes”.
When asked by The Adviser last year 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 to 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 client’s needs and objectives.”
ASIC to look at ‘how the broker shapes which product is purchased’
The objectives of the shadow shopping exercise are also being evaluated under the lens of “good consumer outcomes”, with ASIC this week revealing that the objectives of the study are to “gain insight around how consumers purchase home loans”, identifying “critical events” in the purchase process, understanding the “key inputs and decision-making criteria at critical events” and determining how behaviour is “influenced” during the purchase process.
ASIC will also seek to understand “how the broker shapes which product is purchased and whether the advice offered results in positive consumer outcomes (e.g. making an informed choice, purchasing products that meet needs, being provided with the right amount and relevant information to be able to make a choice)”.
UPDATE (24/01/2018): ASIC has said that customers in the shadow shopping exercise will seek loans through both lenders (such as banks) and brokers and will be “actual customers seeking loans" (not ASIC employees or actors).
ASIC’s Corporate Plan 2017–18 to 2020–21 has a major focus on credit, with interest-only mortgages, reverse mortgages and broker remuneration all under investigation.
The regulator has said that its focus moving forward will be to identify the effect of remuneration structures on the quality of consumer outcomes in the mortgage broking market.
“This builds on our findings in Report 516 Review of mortgage broker remuneration and including a shadow shop of brokers. We will release a public report in 2018,” the regulator said in its corporate plan.
Another of ASIC’s new projects will focus on reverse mortgages, with a public report to be released in the first few months of next year.
The regulator said that it will look into reverse mortgage selling practices to older Australians and those approaching retirement, including testing compliance with responsible lending obligations and measuring consumer understanding of the products.