The interim report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been released, raising a swathe of questions regarding the mortgage broking industry.
The 375-page report (volume one of three) covers the “policy-related issues” arising from the first four rounds of public hearings, which covered consumer lending, financial advice, SME loans and the experiences of regional and remote communities with financial services entities.
It outlined that intermediaries play “important roles in the home loan industry”, but raised many questions relating to who brokers act for as well as broker remuneration.
Remuneration structure for brokers called into question
Picking up its questions from the first round of hearings centering around broker remuneration, the royal commission said that there was “no reason to doubt” the findings of ASIC’s Review of Mortgage Broker Remuneration, nor was there any reason “to doubt that value-based upfront and trail commissions to third parties contribute to those outcomes”.
These outcomes, the commission states, are:
- “Broker loans were reliably associated with higher leverage, even for customers with an identical estimate of risk.”
- “Loans written through brokers have a higher incidence of interest-only repayments, have higher debt-to-income levels, higher loan-to-value ratios (LVRs) and higher incurred interest costs compared with loans negotiated directly with the bank.”
- “Over time, higher leverage means broker customers have an increased likelihood of falling into arrears, pay down their loans more slowly and on average pay more interest than customers who dealt directly with the bank.”
The commission has rebuffed “the assertions” made by Aussie Home Loans and Smartline Home Loans Pty Ltd that the present remuneration structures for intermediaries aren’t shown to lead to any consequence that calls for alteration of the system, adding that these “are not to be accepted”.
It continued: “What is plain, however, is that value and volume-based remuneration for intermediaries in the home loan industry has been an important contributor to misconduct and conduct falling short of community standards and expectations and poor customer outcomes.”
The report goes on to say that the Combined Industry Forum package of reforms are “limited” and — most concerningly — goes on to suggest that trail could be an issue.
“While the perverse incentives created by volume-based commissions, which reward brokers for the number of customers placed with a lender, are to be removed, upfront and trail commissions based on loan value remain.
“While basing those commissions on funds drawn down removes an incentive for brokers procuring a loan larger than the borrower will use, the change does not deal with the more basic problem of borrowers being encouraged to borrow more than they need.”
It added: “Value-based remuneration conflicts directly with customers’ interests.”
However, the commission has also said that bank remuneration and incentives in that arena should also be looked at more closely, stating: “What does require closer consideration, however, is the proposition... that the way in which bank staff are paid does not lead to poor customer outcomes.”
It goes on to ask: “What, if anything, is to be done about remuneration of intermediaries? How is a value-based commission consistent with acting in the interests, or best interests, of the client?
“Should intermediaries be subject to rules generally similar to the conflicted remuneration prohibitions applying to the provision of financial advice?”
Who does a broker act for?
The commission also voiced concern that “the exact role each form of intermediary fulfils at various stages of a home loan transaction is not always clear”.
Indeed, the report states that there is “no simple legal answer” for explaining whom an intermediary — such as a broker — acts for.
The commission report suggests that:
- “In most cases, even if an intending borrower believes or expects the intermediary to be acting in the interests of the borrower, the intermediary owes no general duty to the borrower to seek out the best and most appropriate deal for the borrower.”
- “Very often, the relationship between broker and would-be borrower will either be obscure or a relationship in which the broker owes the borrower no duty larger than not to negotiate an unsuitable loan.”
- “There is no doubt that in the eyes of at least some lenders, the broker’s task is to sell that lender’s products.”
The report goes on to touch on the Combined Industry Forum’s proposal of introducing a “customer first” duty, but does not seem persuaded of its merit.
Commissioner Hayne said: “In particular, it is not clear how this form of duty is intended to differ from the duty to act in the best interests of the client that the Corporations Act imposes on financial advisers. Nor is it clear, if the two forms of duty are to be given different content, why the duty a mortgage broker owes to a borrower should differ from the duty a financial adviser owes a retail client.”
The report therefore asks: “Is it desirable to prescribe that some or all of those who are not employees of banks, but deal with bank customers, must act in the interests, or the best interests, of the client?”
More to come.
The public is invited to respond to Commissioner Hayne’s interim report from the financial services royal commission, which covers the first four rounds of hearings.
Submissions in response to the interim report can be made on the Royal Commission website and must be received no later than 5pm on 26 October 2018.
Members of the public will be allowed to make online submissions to the commission about past conduct until 5pm today (28 September), after which time the commission is expected to “shift its attention from past experiences to proposals on what should be done in response to the issues raised or conduct uncovered within the banking, superannuation and financial services industry”.
The commission will release a final report, which will include the topics of the fifth, sixth and seventh rounds of hearings (focusing on superannuation, insurance and “policy questions arising from the first six rounds”, respectively) by 1 February 2019.
The seventh round of hearings, which focuses on policy questions arising from the first six rounds, is scheduled to begin in Sydney on 19 November and will then move to Melbourne from 25 November.
Details about topics and case studies to be heard will be published prior to the hearings commencing.