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The Year in Review: 2017

The Year in Review: 2017

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With ASIC’s broker remuneration review released, the submissions from industry published and the government’s response soon expected, we thought it was time to reflect on the main themes and ideas coming out of the review, and what the industry had to say to Treasury about it.

IT’S BEEN two years since the government first stated that it would look into remuneration in the mortgage broking industry, nine months since ASIC’s report was released, six months since the consultation closed, and yet we’re still waiting (at time of writing) for the government to release its response. Given the massive amount of work that went into the review (more than 200 million data points were analysed from loans spanning four years), and the range of readings, responses and recommendations that the consultation garnered, it’s perhaps unsurprising that the government is considering all of its options before responding.

According to Treasury, it expects to release an interim response by the end of the year, with a final response coming in the new year, after having considered the response from the Combined Industry Forum, which comprises members of the mortgage broking, banking and consumer group sectors. But what do people want the government to deliver? Let’s take a look at some of the responses...

More ‘proof’ Several of the responses to the consultation that came from mortgage players (rather than lenders) voiced concern that some of ASIC’s conclusions had “no proof”. Writing in his response to Treasury, the CEO of Loans Actually, Glenn McKissack, revealed that he felt compelled to write a submission directly as his aggregator (PLAN Australia) had incorporated its submission into that of its parent company, National Australia Bank. Stating that he was therefore “concerned that this [response] will be tainted” by NAB, he said that he was submitting his own response as “there clearly needs to be a view from a mortgage broking business”.

Mr McKissack wrote: “[ASIC was] extremely positive about the role mortgage brokers play in our current competitive lending marketplace, yet they have also grouped us in with the banks as if the way we are paid is responsible for poor customer outcomes.

Where is the proof?

“To draw the conclusion that the payment of commissions based on loan size to mortgage brokers causes poor consumer outcomes is both incorrect and unproven.... The size of the loan is only important in the fact that it directly correlates with the client’s needs.” Mr McKissack’s call for ASIC to provide more clarity around some of its findings and proposals echoed those from aggregator Connective, who wrote in its submission: “[W]e do not understand exactly what amounts to a ‘good consumer outcome’ and, similarly, what is a ‘bad consumer outcome’. This is problematic as, without a clear understanding as to what these concepts mean, the findings in the review are essentially based on the subjective opinion and supposition of the author.”

Defining a ‘good consumer outcome’

Indeed, Jaime Lumsden Kelly, solicitor director at The Fold Legal, told The Adviser that there was currently no legal definition of a “good consumer outcome” in financial legislation (however, ASIC has told The Adviser what it believes a “good consumer outcome” looks like; see page 24 for more). Adding that there are some “clues” as to what that could be (for example, ASIC’s report on life insurance being sold through car dealers [REP 471] refers to value for money, or ensuring that those in the space are operating under an “efficient, honest and fair” ethos), “there is no definition of good consumer outcome because this is not something that has legislative mandate right now”.

Ms Kelly told The Adviser: “It’s just not in the legislation. So, it’s something that is being made up as we go — and I think that makes it particularly tricky. And that’s one of the reasons why I think — if we end up in one of those situations where we do have consumer outcome mandated — it’s either going to come from a lot of ASIC guidance (which they would probably develop using their efficient, honest and fair power) or it would be mandated by the government through legislative changes. “But otherwise there is no guidance, which is why you can’t answer that question — it’s a new concept.”

Connective’s group legal counsel, Daniel Oh, has previously said that one of the aggregator’s “big fears” was that “some people could think a good consumer outcome is the lowest rate or the lowest amount paid”. “That is very dangerous because you’re overlaying someone’s view of what ‘good’ means into a test where there are different individual circumstances,” Mr Oh said.

“So, that’s why, in our submission, we go back to the general principles: the loan must not be unsuitable, meet all the regulator guides that ASIC has already released... and [the industry should] really be making sure they’re enforced, that everyone is focused on supervising that and ensuring they are complied with. If they are, we would hope that ‘good’ (whatever that means) consumer outcomes flow as a result.”

If the government is to appease the industry, surely one of the first steps has to be creating a clear definition of what a good consumer outcome actually is. But that could take many more months of consultation.

Self-regulation or co-regulation?

Another key theme coming out of the responses to Treasury was the idea that the mortgage industry should either self-regulate (rather than be the subject of government legislation) or “co-regulate” with the banking industry.

CBA, for example, said that it supports a “self-regulatory model” when it comes to broker remuneration but highlighted that a “consistent approach” is needed. It suggested that it would be “helpful” if the financial services regulator were to provide “regulatory guidance” regarding the “most appropriate regulatory or legislative mechanism” for “further consideration” by the industry.

While the big four bank did not make any specific suggestions on remuneration, other major banks — such as Westpac, which outlined the perils of tying broker commissions to loan-to-value ratios (“reducing the commission payable on these types of loans may deter brokers from acting in this space, presenting additional challenges for first home buyers”), and NAB, which suggested that the standard commission model be “adjusted” so they are based on the drawdown amount — did support a uniform approach to any changes.

Westpac agreed that if lenders changed their approach to upfront commissions individually, there would be a risk that each lender may develop different methodologies for the calculation of commission.

The bank warned: “This could result in lender choice conflict where a broker may be encouraged to favour or promote the product of the lender that will deliver a higher commission payment.” This aligned with the notions of the Australian Bankers’ Association (ABA), which has been working with a number of mortgage broker and banking associations (as well as lenders, aggregators, brokers and consumer groups) to prepare policy solutions for government on “commission models, enhanced governance and greater transparency”.

However, in a matter of weeks of these responses being published, the ABA announced that the banks would produce individual, rather than sector-wide, approaches to remuneration.

Speaking to The Adviser, FBAA director Peter White said: “We were concerned that [the banks] would beat their chest and we would all be left in the dust. I was exceptionally against that sort of thought process, so I’m glad to see that that time has passed and the Combined Industry Forum is working exceptionally well together.”

Mr White emphasised that the CIF would not be “browbeaten” into producing an outcome, but instead ensure that all voices are represented in its final report.

He said: “There are about 30 people who sit at that table and they [the ABA] are just one voice. I know there might be some cynicism in the marketplace where cynics might think the ABA might try and manipulate the Combined Industry Forum to get their [own] outcomes anyhow, but if anybody is thinking that, then I can reassure them that that is not the case at all.

“No one can change what the banks are going to do on their own individual, commercial decisions. Whatever the banks decide to do commercially is one thing, but the CIF is about putting out an industry-wide overview on the six proposals by ASIC. “So, I’m glad to see that [the ABA has] walked away from [some] of the original proposals… and I think that this is the right approach.”

84 The number of businesses reviewed

 27 The number of published submissions

 71% The percentage of brokers responding to a survey on The Adviser that believe the remuneration review will negatively impact commissions

1.4m The number of home loans analysed

30 The number of submissions to Treasury

The Year in Review: 2017
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