The New Zealand consumer advocacy organisation has recommended that commission payments to mortgage brokers be banned.
In the wake of the Australian financial services royal commission, Consumer NZ has suggested that commission payments to mortgage brokers should be banned in New Zealand.
While the idea of an outright ban on broker commissions has been widely rejected in Australia, the consumer group took a similar stance to that of its Australian counterpart Choice, calling for a ban of broker commissions.
However, should an outright ban not be feasible, the consumer organisation told the New Zealand Parliament’s Finance and Expenditure Select Committee that rules around commissions, bonuses and soft-dollar benefits should be introduced to de-link the payments paid to brokers to the size of a customer’s loan.
A similar recommendation was put forward in Australia by the Australian Securities and Investments Commission’s (ASIC) remuneration review last year.
Consumer NZ told the parliamentary committee: “One of the most damaging revelations to come out of the royal commission was the practice of banks overstating income and understanding expenses in order to offer larger mortgages.
“In New Zealand, around 40 per cent of mortgages are arranged through brokers rather than direct with the lender.
“However, none of our regulatory agencies have been investigating the broking market to gauge whether the same problems exist here.”
The organisation added that there has also not been any investigations into the “problems” broker commissions could be causing.
“The amount of commission a broker receives is directly proportional to the value and volume of the loans and insurance policies they sell,” Consumer NZ said.
“Broker are, therefore, incentivised to sell big loans and expense life insurance policies, and to move clients from one financial product to another in order to maximise their commissions.”
The organisation suggested that commissions be banned in New Zealand, or failing that, rules should be reformed in line with the recommendations of ASIC so that they are paid on draw down amounts net of offset.
New Zealand banks made the decision in 2006 to remove trail commissions on home loans, with payments going from 0.65 of a percentage point upfront and 0.20 of a percentage point trail to an average of 0.85 of a percentage point upfront only.
According to Loan Market broker Bruce Patterson, while the abolishment of trail was offset by the increase in upfront payments, “a lot of brokers saw it as a backwards step for their businesses, as they were previously being remunerated for looking after the customers on a long-term basis, but the banks saw it as an expense they didn’t need to pay and saw brokers as a lead generation source more than a business partner”.
He continued: “What resulted was a culture of churn in the industry that has meant a number of lenders have now gone back to a trail model 10 years later to try to avoid this happening.
“Only half of the banks have gone back to trail, the other half are still paying 0.85 of a percentage point upfront only. The banks that have gone back to trail range from 0.45 to 0.60 of a percentage point upfront and 0.15 to 0.20 of a percentage point trail.”
The calls from Consumer NZ are timely given the imminent release of the interim report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Given the closing remarks from the first round of royal hearings, it is expected that broker remuneration will be discussed in the interim report.
However the mortgage industry has been proactively working to self-regulate, with significant collaboration and cross-sector workings. Both the Combined Industry Forum and Mortgage Broker Forum formed recently to provide a voice for the broking industry off the back of scrutiny from the ASIC remuneration review, the Sedgwick review, the Productivity Commission’s inquiry and the royal commission.
The Australian Department of Treasury also acknowledged in a recent background paper to the Hayne royal commission that the broking industry has been taking steps to introduce changes to broker remuneration that aim to improve the commission structure and eliminate perceived or real conflicts of interest.
“The CIF proposals are positive developments which Treasury welcomes. Whether the adoption of these reforms by individual firms is sufficiently widespread and remains in place will need monitoring, as will the risk of other arrangements being developed to replicate the discarded elements under a different form or name,” the background paper stated.
More recently, Aussie Home Loans CEO James Symond brought together some of the broking industry’s biggest businesses and federal Treasurer Josh Frydenberg to discuss the issues affecting the broking industry face-to-face.
The Treasury had outlined in its royal commission background paper that it did not believe there was “compelling evidence of major problems that require a wholesale change to the existing standard commission structure given the industry reforms currently underway”.
[Related: Industry leaders meet with federal Treasurer]