The major banks have all voiced their support of the Combined Industry Forum’s broker remuneration reform package, arguing to the royal commission that the “existing model for mortgage broker remuneration is not inherently problematic”.
On Thursday (8 November), the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry began releasing responses to its interim report.
Notably, all four of the major banks (ANZ, CBA, NAB and Westpac) noted the moves already afoot in the industry to change broker commissions so that they are tied to the loan account balance (net of any offset account balances), rather than the full limit.
The majority of lenders are expected to make the remuneration changes by the end of this year.
ANZ said that it supports the views of the CIF, adding that it believes the package of reforms would help “minimise the risk of misconduct and poor customer outcomes”.
Noting that it has committed to implement the CIF’s proposed commission changes “by the end of 2018”, ANZ added that while value-based commissions (i.e. payment of an upfront and trail commission) “may increase the risk of mortgage brokers recommending larger loans than required”, it also believes that this risk may be mitigated by the implementation of the CIF proposals.
“ANZ supports the continued use of trail commissions for mortgage brokers. Trail commissions promote better customer outcomes by giving brokers an incentive to recommend loans that will be suitable to the customer for the life of the loan, and assist the industry to attract and retain quality brokers,” the bank said.
The major bank did, however, suggest that it was “not opposed to an industry-wide move away from value-based remuneration of home loan introducers towards a flat fee arrangement”, given the “limited role performed and services provided by home loan introducers”.
In its response to the interim report, the Commonwealth Bank of Australia said that appropriate remuneration structures for intermediaries (including mortgage brokers) “should be structured in a way that avoids clients being sold the wrong product, or being sold a product that is not needed (including too much of a particular product)”.
Being a participant in the CIF, the banking group (which includes Bankwest) said that it was “committed to implementing reforms to improve customer outcomes”, noting that one such reform is that broker commissions should relate to funds drawn down and utilised (net of offset account balances) rather than the size of the loan.
Bankwest has already changed its practice in relation to utilised funds and CBA said that it was “working to implement similar changes by 31 December 2018 (in line with the CIF recommended timeline)”.
CBA further told the royal commission that “legislation would be required to change the current market commission structures beyond those that have been proposed through the CIF and that any such change should occur after industry consultation”.
“This would ensure that any outcome achieves the proper balance of eliminating conflicts of interest that lead to potentially poor client outcomes and ensuring that existing and future participants can still be financially viable,” its submission read.
The response continued: “The group recognises that Aussie Home Loans, as a standalone mortgage broker business, has a different view about the appropriate way to remunerate mortgage brokers.
“They also do not support the extension of FOFA obligations to mortgage brokers.”
In its response to the royal commission, NAB noted that the value-based commission model ensures that “broker services are affordable to customers (as they are paid by the lender), and creates a level playing field for competition for smaller and more geographically dispersed lenders”.
However, NAB said that it recognises that this standard model “has the potential to create conflicts of interest”, as highlighted by ASIC and the royal commission, and outlined that the CIF reform package proposed changes to remuneration to address both forms of conflicts.
NAB noted that, effective from 12 November 2018, the upfront broker commission for NAB home loans will be calculated based on the drawn loan balance, not the total approved facility amount, and net of any offset facility, thereby “reducing the incentive to recommend an inflated loan size”.
However, the major bank said that it “recognises that the current changes being implemented do not entirely remove the potential conflict of a commission-based model”, and therefore “accepts that if there is a policy-based reason to move away from value-based commissions entirely, the industry should reconsider a commission-based model”.
The major bank emphasised that such a reason would need to provide evidence that customer outcomes are “jeopardised” by value-based commissions.
“NAB also believes there needs to be greater clarity on what services are provided for the payment of upfront and ongoing remuneration,” its submission read.
“However, NAB does not consider that appropriately structured value-based commissions per se affect customer outcomes.”
Westpac told the royal commission that it was “in customers’ interests that brokers remain a viable channel, as it has been recognised that a large number of Australians value brokers as a means of accessing finance”.
The bank said that moving to other forms of remuneration (such as an upfront flat fee) may therefore “affect access to finance and raise potential conflicts in other ways (given the likelihood that borrowers of relatively small amounts will subsidise borrowers of larger amounts”).
The response read: “Sensible precautions, including clawbacks for loans cancelled or in arrears, and commissions based on the amount drawn down rather than loan size, help mitigate any risk that a broker may be incentivised to encourage a customer to seek larger loans or new loans unnecessarily under the current model.
“Westpac also supports clearer disclosure of broker fees so that customers are better able to make an informed choice about how they access finance.”
The bank concluded that “the existing model for mortgage broker remuneration is not inherently problematic”, noting that as there is “a wide range in the complexity (or simplicity) of the work to be undertaken in mortgage broking”, there are “challenges for determining appropriate remuneration for ‘services’ which do not recognise a direct link between the amount of work (‘and, accordingly, appropriate remuneration’) and the size of the loan”.
It suggested that an upfront flat fee for service might “discourage brokers from facilitating more complex or time-consuming loans (because the added effort is not compensated)” or “impede access to finance for some customers because of higher upfront costs”.
Westpac concluded: “Brokers provide an important function to customers through their role in identifying a bank or other lender willing to provide the customer with a loan that meets their needs, and then acting as an intermediary between the customer and that bank or lender.
“Customers need to understand the nature of the role brokers play and the way brokers are remunerated, including any matter which could potentially affect any product recommendation.”
[Related: Bank announces remuneration changes]