A group of the country’s leading mortgage brokers have handed a report to Treasury that puts forward six recommendations to “sharply improve governance in the sector”.
The Mortgage Broker Forum (previously referred to as the Mortgage Industry Forum), a group of 11 independent broker firms that have been working with the support of hundreds of individual brokers, commissioned and funded the report in response to calls for changes in the financial services industry over the past 18 months and following the commencement of the Royal Commission (RC) into Misconduct in the Banking, Superannuation and Financial Services Industry.
The forum, which was “established to provide a voice for individual mortgage brokers”, has said that it intends to “work closely with other industry groups, including the Combined Industry Forum (CIF), to achieve better outcomes for customers”.
Indeed, the report relies on reports and reviews undertaken by the CIF, the Australian Banking Association’s (ABA) Sedgwick review, the Mortgage & Finance Association of Australia (MFAA), the Australian Securities and Investments Commission (ASIC), the Productivity Commission (PC) and Deloitte Access Economics.
After outlining the value of mortgage brokers and what they do, the report delves into broker remuneration and potential conflicts of interest before providing a summary of several recommendations that have been forwarded from different bodies relating to changes in the sector and outlining the forum’s own responses, including their six recommendations.
Speaking following the public release of the report, Mark Bouris, founder of Yellow Brick Road and member of the Mortgage Broker Forum, commented: “It is critical that mortgage brokers remain a sustainable force for competition in the lending market. Otherwise, the big lenders will dominate.
“At the same time, the industry needs to keep improving its own performance. Mortgage brokers understand the need to evolve and work with lenders and aggregators to better improve outcomes for customers.
“We believe our recommendations would greatly enhance confidence in mortgage brokers and the services they offer.”
Recommendation 1: Upfront and trail commission
After stating that the upfront and trail commission remuneration structure provides a strong incentive for mortgage brokers to put customers in the right loan the first time and promotes competition, it recommended that upfront and trail commission (which the MBF suggested would be “more correctly referred to as a ‘deferred upfront commission”) should be calculated on a “fair, equitable and reasonable basis for mortgage brokers and lenders”.
The MBF supported the CIF’s proposal that upfront commission should be paid on a utilisation basis (i.e. the facility limit drawn down by the customer, net of offset), adding that trail commission should also be paid on the amortised drawn down amount, net of offset.
Recommendation 2: Best practice guidelines
While moving away from the CIF’s proposal to introduce a “customer first duty”, the MBF said that all mortgage brokers must work towards providing the “best possible outcome for customers”.
It suggested that it would work with the CIF in establishing its industry code of conduct, and recommended that, as part of that, best practice guidelines for mortgage brokers earning trail commission should be introduced.
The MBF report reads: “Under the guidelines, the mortgage broker would need to demonstrate that:
- they put customers’ interests before their own interests;
- they have been in regular contact with the customer;
- they have offered the customer at least annual reviews of their personal financial circumstances; and
- they are available and qualified to meet with the customer and review their personal financial circumstances and make changes where necessary.”
Recommendations 3 and 4: Move away from volume and campaign-based commissions and soft dollar benefits
The MBF reiterated the CIF’s recommendations to move away from volume-based bonus commissions and campaign-based commissions as well as soft dollar benefits, and to produce guidelines for tiered servicing models, conferences and professional development events.
Recommendation 5: Transparency of ownership
As ASIC’s remuneration review said that a clearer disclosure of ownership structures is necessary, the MBF stated that “disclosure should occur at all distribution points” where the ownership of the entity employing the broker is more than 20 per cent, and where less than 20 per cent, a board seat is held or a white label product is offered by a substantial shareholder.
Recommendation 6: Creation of Registered Credit and Compliance Holders
The final recommendation called for the development of Registered Credit and Compliance Holders (RCCH), which would continue to aggregate mortgage brokers and lenders but also be responsible for the behaviour and compliance of its aligned mortgage broker network.
The MBF report outlined that aggregators would therefore be given new responsibilities to oversee audits and compliance in the lending market, and would:
- Be responsible for compliance of all mortgage brokers who use the aggregator to assist with their mortgage broking operations, regardless of whether the mortgage broker is a credit representative under the aggregator’s ACL.
- Provide mortgage brokers with access to lenders, as per current arrangements.
- Provide professional development, infrastructure and technology support to mortgage brokers, as per current arrangements.
- Be expected to audit each mortgage broker once a year, ensuring the mortgage broker has adequate notes and records of client discussions.
ASIC would oversee the RCCH, the report suggested.
Speaking of the RCCH, Mr Bouris said that it would “help ASIC do its job of supervising the mortgage broker industry, helping achieve better outcomes for customers”.
“Aggregators would play an expanded role in the sector by holding the umbrella licence and ensuring its licensees comply. Mortgage brokers would become more accountable for their decisions,” the YBR founder said.
“The change would help ensure a healthy mortgage broker industry, which is critical to keeping the home lending market competitive. More than half of all mortgages, worth around $200 billion a year, are organised through mortgage brokers.”
Fronted by Yellow Brick Road’s Mark Bouris, the principals of the Mortgage Broker Forum include many of Australia’s elite brokers, such as:
- Jeremy Fisher, 1st Street
- Moshe Moses, Astute
- Kevin Agent, Jason Back and Mark Davis from the Australian Lending & Investment Centre (ALIC)
- Will Foster, Foster Finance
- Justin Doobov, Intelligent Finance
- Andrew Mirams, Intuitive Finance
- Josh Bartlett, Loan Market
- Theo Chambers, Shore Financial
- Gerard Tiffen, Tiffen & Co
- Katrina Rowlands, Mortgage Success
- Rogan Yates, Yellow Brick Road