The wait is finally over; ASIC’s report into mortgage broker remuneration is here. It’s been a long time coming; the review was first mooted in 2015, when the government released its response to the 2014 Financial
Systems Inquiry, stating it would “address the misalignment of incentives by reducing and improving the disclosure of conflicted remuneration in life insurance, stockbroking and mortgage broking”.
But, after having made the announcement October 2015, the ball only really got rolling in 2016, when ASIC began talks with the mortgage broking industry and fully understood the gargantuan undertaking it had been tasked with. On the face of it, the job sounded simple; identify and value the remuneration arrangements that exist in the mortgage broking market; assess consumer outcomes in the mortgage broking market; review the remuneration arrangements for lenders’ own staff who provide home loans (as well as the consumer outcomes linked to this distribution channel); and review the composition of aggregators’ lender panels, including whether smaller lenders could access those panels. But, tapping into a market that had grown exponentially in a few years is easier said than done, and ultimately involved reviewing an industry that hadn’t ever been fully reviewed in this country.
Mike Felton, CEO of the Mortgage & Finance Association of Australia explains: “It was simply our time. The financial advice industry had been looked at. The insurance industry had been looked at and it was time to look at the broker industry. I think it’s an indication of the maturity of our industry and the significant role that brokers play in home loans.
“However, I think over the year, there were a number of occurrences that actually increased the level of scrutiny and focus and risk associated with the process. One was an election and talk of calling for a royal commission and greater scrutiny on remuneration within the banking sector.
There was also the ABA Sedgwick process that was established in response to that to try and rebuild trust and confidence. And then, finally, in the US we had Wells Fargo and their whole cross selling fiasco that put a big focus on cross selling and pushing of commissions... so, it really became an area of focus globally... And that certainly raised the level of scrutiny and attention on our process.”
In the end, the review gathered four years’ worth of mortgage data (2012-2015) from 19 lenders, 14 aggregators, 44 broker businesses, four comparison sites and three referrer aggregators, analysed 157 data points in 1.4 million home loans and surveyed 3,000 consumers to better understand perceptions and experiences with brokers. It was a huge undertaking and one that even ASIC admitted was larger than anticipated. In November 2016, just a month before the report was initially due, ASIC’s group senior manager for credit, Chris Green, revealed that “determining the effect of the current remuneration structures on the quality of consumer outcomes” had been “pretty difficult to do”. In fact, the review was so data-heavy that ASIC requested an extension to its deadline, which was granted at the end of the 2016. Three months later, and the report was finally released.
But, Mr Felton says that it was all for the greater good: “Was it necessary? Yes, I actually believe it was. For a long time, there was talk in policy circles about the impact of commissions on outcomes but there was never really any data available to come up with good conclusions. Now we have that, and I had far rather we had gone through this process with ASIC than in any other forum, I think it’s been a well-considered process at the right time.”
So, what did the review actually find? After outlining how the industry works, the 243-page report put forward 13 findings and six proposals that could “improve consumer and market outcomes” (see side boxes). To the relief of many, the financial services regulator found that the data “did not identify trail commissions [as] directly leading to poor consumer outcomes”.
However, it did suggest that the standard model of upfront and trail commissions creates “conflicts of interest”, because brokers “could be incentivised to recommend a loan from a particular lender in order to receive a higher commission, even though that loan may not be the best loan for the consumer”.
Language like this has concerned some in the industry, such as Monique Hope-Pearson, Connective’s group legal counsel. Stating that the report is generally “fairly benign”, she warned: “ASIC refer to this new concept of placing the consumer in the best loan — and I personally take issue with that, because that is not the requirement in the legislation.
“The legislation responsible [i.e. the National Consumer Credit Protection Act] speaks about ‘not unsuitable’, a very different standard. So, we’ll talk to ASIC about that in detail.”
Although ASIC hasn’t proposed any regulatory changes to the NCCP, it has proposed that lenders could change their standard commission arrangements so that brokers are not incentivised “purely on the size of the loan”. For example, it says that lenders could reflect the LVR of the loan (and other considerations such as compliance metrics) in how they calculate upfront and trail commissions.
ASIC did propose, however, that industry “moves away from bonus commissions and bonus payments”, as well as “soft dollar benefits”, as they “increase the risk of poor consumer outcomes”. But, Brett McKeon, executive director of AFG, says that whatever government eventually decides to do on soft dollar benefits (if anything), they need to ensure an even playing field. He explains: “There are guidelines already in place with the Future of Financial Advice (FOFA) reforms for soft dollars in the planning industry. While they haven’t banned it, what they have done is make sure that nothing gets through that could influence the broker or the planner for the sale.”
Despite providing just a handful of proposals to government, now under public consultation, the report has divided and frustrated the mortgage broking industry, with some welcoming the fact that it has largely supported the way in which brokers are remunerated, and others warning that the proposals could paint the industry in a negative light.
Indeed, ASIC itself seems at odds over the value proposition of the broking industry. While ASIC chairman Greg Medcraft was generally positive about the broking industry in an interview with ABC’s The Business following the release of the report, the infographics that the commission put out with the review could give readers a negative view of the profession.
For example, ASIC’s infographic ‘What we found’ has a section summarising how the broker channel compares to direct. Notably, this infographic makes no mention of the positive outcomes that brokers can deliver to customers, instead detailing that broker customers ‘borrow more, have lower property values, have higher loan to valuation ratios, spend more of their wage on their mortgage, take out more interest-only loans, get the same rate as direct consumers, and pay down the loan slower’. It’s not a flattering light to be seen in, and by neglecting to contextualise the figures — can be damaging to the broking reputation.
It’s conclusions like these, offered without context, that have some in the industry worried. Mark Haron, director of the major aggregator Connective, told The Adviser: “I guess what we want to do is get the terminology correct in this area. Is that a real conclusion or is it just something that is seen through the data, and how has that come about?
“[Finding 8 on] arrears is a good example. It would be fair to say that all of the mortgage broker business carries slightly higher arrears, only slightly. But that is based on the fact that if we looked at a major bank, the arrears rates of first party to broker would be very comparable. There’s not a lot of difference and we know that because those banks have told us that. Where the difference comes through is that most customers have come to a broker when they have slightly irregular activities and that broker has the capabilities to take them to… another funder where those circumstances fit. So naturally, when you start to compare like with like, broker arrears are no worse than branch network. But, when you look at the whole scope, naturally brokers will pick up some of that lending that is done with particular specialist lenders as well.”
The MFAA’s Mike Felton agrees, saying: “There was a series of statistics in the report that talk about the broker channel having higher loan amounts, higher LVR’s, a greater proportion of interest-only, and that resulting into potentially higher risk. Why would that be? It’s because their demographic is a younger demographic earning less. Those statistics are not necessarily indicative of a poorer outcome. They could very well indicative of the greater complexity of deals that end up in the broker channel… brokers find solutions when a particular customer has not been able to find a solution direct with their lender.
“So, by nature, complexity gravitates towards the broker channel and brokers are great at finding solutions. Those could be really good outcomes for consumers and getting mums and dads into homes.”
Peter White, executive director of the Finance Brokers Association of Australia (FBAA) says that Finding 5 could also be taken out of context. “The difference is only about $45,000 — not hundreds of thousands of dollars difference between what a broker organises and what a branch organises… With all the brokers I’ve spoken with over the last 38 years, no one’s ever turned around and tried to push another 40 grand onto a borrower so they can get another handful of dollars for it. It just doesn’t exist...”
He adds: “Anyone who wants to change the commissions in our sector is going to get enormous arguments by industry. It’s not like the model’s wrong. If the model was wrong we’d see that globally.
The model’s not wrong. Therefore, it’s not for government to turn around and restrict people’s ability to earn an income.
“Part of the problem at the moment is some of the data that ASIC put out… can get twisted, because some of the data doesn’t go far enough,” he concludes. Lawyer and broking industry specialist Jon Denovan, senior partner at Dentons law firm, agrees that some of the proposals are not necessarily backed in the data. He explains: “The ASIC report does say that they saw some evidence of volume incentives changing volumes or loans written. But I have not seen where it says that that has resulted in a bad result for consumers.”
In fact, Mr Denovan, and many others in the industry, say that some incentives — such as professional development days — can actually boost good consumer outcomes: “Brokers should go to industry functions and meet lots of lenders and learn about products… and they’ve all got a little booze and they’ve all got a bit of a gift for you, and they might take you to dinner later in the night. But that’s competition. And if you don’t have that competition, and you don’t spend some money on your target market, you don’t reach the target market. And therefore your target market is less informed.
Your broker is less informed and therefore can’t help the consumer as well.
“Without money to support those activities, those activities will go away and they are valuable activities.”
The MFAA’s Mr Felton agrees that some incentives are good for business, telling The Adviser: “It is one aspect saying that a particular incentive can cause conflict, it is another to establish whether it is in fact causing conflict. The key is to work and find ways that we can adjust on volume-based incentives and soft dollar incentives to ensure that it does not diminish competition and choice. So, look at what the incentive is for and not what the incentive is. If it’s rewarding across the broad spectrum of lenders and products, then it is appropriate.”
Whether it be disclosing commissions, or highlighting any soft dollar benefits, or even that the aggregator the broker uses is owned (or part owned) by a lender, the main thing that ASIC wants the industry to do is be upfront about it and ensure that the consumer knows exactly how a broker is remunerated, and from whom.
But, would providing all this information to the consumer drive good consumer outcomes? How many people actually read all the disclosure documents they are already given? Broker Martin Vidakovic from MV Finance puts it thus: “Let’s not overcomplicate something that can be simple, really transparent to the consumer and beneficial that they understand as well. It’s complex enough already.”
So, what’s next? The ASIC report on remuneration is available to read on The Treasury website, and is open for consultation until 30 June 2017. From there, it could be another year before any regulatory changes (if any) are announced and put into action.
For now, the advice coming from aggregators, lenders and the association is ‘business as usual’ and ensure that your voice is heard by responding to the consultation, either directly or through the relevant groups.