Fees for service would not benefit brokers, the Australian Banking Association has told the Productivity Commission, adding that commissions should instead be changed to be calculated on drawdown amounts.
In response to the Productivity Commission’s information request concerning whether consumers should pay brokers fees for service, the Australian Banking Association (ABA) said that a fees-for-service model “should be approached with caution”.
The ABA claimed that such a model would be a “significant disadvantage” to brokers, hinder market competition and limit consumer choice and access.
The banking association noted that a fees-for-service model could:
- result in additional direct costs to consumers to access the broker channel
- put brokers at a significant disadvantage to the lender branch channel (who do not charge direct fees)
- result in rationalisation of broker numbers, increasing barriers to entry for new lenders, while disadvantaging smaller lenders and those without a branch footprint
- not correlate to economic value produced by the broker
- result in brokers servicing a much narrower band of customers
ABA on trail commission
In its submission, the ABA also defended trail commissions, noting that it “promotes good customer outcomes” by incentivising brokers to service borrowers throughout the term of their loan.
The industry association also stated that it is “actively considering opportunities” to “use trail as a lever” to drive positive behaviour.
“Trail commissions are designed to align the interests of brokers and consumers to provide ongoing service (at appropriate intervals) over the term of the loan,” the ABA noted.
“It also serves to promote good customer outcomes, as it is standard industry practice to ‘switch off’ trail commissions if the loan goes into arrears.
“The industry is actively considering opportunities to use trail better as a lever to drive the right behaviours for brokers and align to the performance of the loan.”
ABA defends clawbacks
The PC has claimed that clawbacks inhibit “switching” by creating a “direct disincentive” for brokers to refinance a client’s loan.
In response, the ABA argued that clawbacks discourage the writing of loans that are not appropriate for clients.
“Clawbacks enable cost recovery and discourage writing of loans that are unaffordable or unsuitable for customers.”
ABA points to CIF recommendations
The banking association, which is part of the Combined Industry Forum (CIF), reiterated its support for the group’s recommendations surrounding broker remuneration, which include the removal of volume-based incentives and “soft dollar” payments.
The ABA also restated its support for “clearer disclosure requirements” in the mortgage broking industry, pointing to measures put forward by the CIF, which would establish a sector-wide “public reporting regime”.
Additionally, in response to the PC’s call to impose a duty of care obligation on lender-owned aggregators, the ABA pointed to the CIF’s work, claiming that the “banking industry is already taking action to better protect consumer interests”.
Best interests duty
The banking association told the PC that it also supports further exploration of a duty on both aggregators and mortgage brokers to “prioritise the interests of a customer ahead of their own”.
The submission reads: “This duty would be a means of addressing concerns that aggregators and brokers make business decisions and/or recommendations to customers that are conflicted, or motivated by, their own interests.
“Such a duty, known as the ‘conflicts priority rule’, could be similar to the duty imposed on financial advice providers under section 961J of the Corporations Act 2001 (Cth) which was introduced as part of the Future of Financial Advice reforms in 2013. However, the duty would need to be designed and fit for purpose for the mortgage broking industry, which is fundamentally different to the financial advice industry.
“If a similar model was adopted for the home lending market, aggregators and brokers would not be permitted to act to further their own interests or those of a related party over those of the customer when providing the service.”
The ABA added that, in complying with the duty, “mortgage brokers would potentially need to consider what a reasonable mortgage broker without a conflict of interest would do”.
It concluded: “The ABA believes that exploring the ‘conflicts priority rule’ has considerable merit as it can be clearly articulated and [its] compliance documented.
“The banking industry is currently considering the potential formulation of this obligation and how it could be codified. We support consideration of this obligation being implemented through a robust industry code, such as the mortgage industry code that will be developed by the CIF.”