The corporate watchdog has identified the possibility that brokers could be driven by commission to recommend bigger mortgages to borrowers.
Speaking at the release of a report on interest-only loans yesterday, ASIC deputy chair Peter Kell said that while the regulator makes no claims that broker remuneration structures are the cause of all the issues identified in the report, ASIC has flagged potential for conflicts of interest to lead brokers towards a preference for recommending higher loan amounts.
“That is something that both lenders and brokers need to keep in mind and then to ensure is not influencing their behaviour,” Mr Kell said.
“They also need to ensure that that’s not overriding their responsible lending obligations.
“We do keep a close watch on the broker channel.”
Mr Kell said ASIC has taken actions against approximately 29 brokers in recent years.
“Often those cases have arisen out of a desire to generate more commissions,” Mr Kell said.
“So it is an area that we are quite active in. If we see it leading to a problem here we will call it out.”
ASIC’s report found that there may be some incentive for a broker to recommend an interest-only home loan, as the principal will not initially be paid down and the trail commission will be paid for a number of years on a higher balance.
The report found that, on average, consumers borrow more under an interest-only home loan – possibly because of the lower initial repayment figure under this type of loan and the effect of ‘present bias’.
“This may be an incentive for brokers to recommend an interest-only home loan,” the report said.
“Conflicts of interest could be generated because of the higher commissions paid to brokers in line with greater loan amounts.”
ASIC's report is the result of an investigation into 11 lenders – nine banks and two non-banks – that forms a broader crackdown on responsible lending involving APRA and the Reserve Bank.
Earlier this year the RBA warned that an increased use of mortgage brokers as a distribution channel is creating risks for lenders and borrowers.
In its March Financial Stability Review the RBA said industry estimates indicate that 40 to 50 per cent of new housing loans are now sold through mortgage brokers.
“The more banks use brokers, the greater is the risk that a misaligned broker-incentive structure would generate significant amounts of lending that is outside their risk tolerance or is otherwise inappropriate,” it said.
The central bank's comments sparked a strong reaction from the broker industry including its peak bodies.
Following the release of ASIC’s report this week, FBAA chief executive Peter White described the result as a positive one for brokers and the industry.
“We know we have been doing terrific work looking after the interests of our clients and that shows with more than half of all housing loans now written by brokers and ASIC’s findings show nothing to suggest otherwise,” Mr White said.
The FBAA chief agreed with ASIC’s findings about the need for better documented proof of evidence to support serviceability calculations.
“This is a bit of a wake-up call for everyone to be on their game and to think big picture when it comes to assessing the ability of a customer to repay not just for now but in the future,” he said.
“Brokers have to ask questions and keep digging and take into account the possible change in a customer’s circumstance,” he said.
“We have to always look ahead and ensure we maintain responsible lending practices when there is uncertainty over future income streams.”
“We do not need creative, happy-go-lucky brokers. We want responsible professionals who take time and effort to ensuring the most suitable outcome for our customers.”
ASIC’s review of more than 140 consumer loan files from bank and non-bank lenders identified that in 40 per cent of files reviewed, the affordability calculations assumed the borrower had longer to repay the principal on the loan than they actually did.
Mr White said he is eager to see the breakdown of just how many of the 140 home loan interest only loan files that were reviewed were actually written directly by banks as opposed to brokers.
“All in all, ASIC’s review shows we keep doing things right and is terrific news for our highly professional sector which continues to provide unparalleled service and diversity across the country.”
[Related: Broker calls for standardised commissions]