Several major banks have warned the royal commission of the “potential adverse consequences” of moving from the existing broker remuneration structure to an upfront flat fee.
Following a call for evidence regarding the potential impacts of moving to a lender-paid upfront flat fee, NAB told the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that there was “insufficient evidence presently before the commission to enable a meaningful answer to be given to the question posed”.
The big four bank stated that it was its position, “rare exceptions notwithstanding”, that the upfront and ongoing trail commissions that NAB currently pays to brokers and head groups “do not lead to poor customer outcomes”.
Although NAB backs industry-wide changes to the use of upfront and trailing commissions as recommended by the Combined Industry Forum, it argued that the commission would need to consider several matters before being able to answer the question “meaningfully”.
These matters, the big four bank said, included:
- The basis on which ASIC did not find systemic evidence of poor customer outcomes in its review of Mortgage Broker Remuneration (being ASIC Report 516).
- The benefits arising from the ongoing services offered to customers in exchange for trailing commissions and the impact on customers of removing those services.
- The experience and impacts of broker remuneration reforms on customers in different countries.
- Whether customer outcomes would be improved or worsened by possible changes to the commission structure. In particular, whether such changes could have the effect of creating:
- unintended consequences of restricting the provision of credit for certain segments of the market (such as first-time home buyers).
- new or increased conflicts of interest (such as the risk that a flat-fee commission creates incentives for brokers to offer customers multiple smaller or “split” loans).
- the extent to which a change may affect viability and competitiveness of the industry, and the flow-on effects for customer outcomes.
NAB argued that it believes the reforms announced by the Combined Industry Forum would, “in broad terms”, ameliorate potential conflicts of interest from broker remuneration.
Meanwhile, CBA outlined that while it believes “replacing upfront and trail commissions with an upfront flat fee de-linked to loan size can address identified areas of conflict”, any changes should be “carefully designed” to:
- avoid creating new conflicts, such as unnecessary loan splitting (i.e. to generate more accounts per customer and greater fees) and conflict over lender choice
- avoid reducing the availability of service to key customer segments, as “a flat-fee payment has the potential to incentivise brokers to focus on simpler loans rather than serve customers with more complex needs or customers who are less familiar with the mortgage market or processes, such as first home buyers”
- ensure the sustainability of the broker channel including by appropriately grandfathering existing arrangements
- be applied uniformly
It added that its submission to the Sedgwick review noted that “a move to a flat-fee payment would enable brokers to be agnostic towards loan size and leverage… [and] could also consider the removal of ‘trail commissions’ which can encourage brokers to suggest slower paydown strategies (e.g. interest-only) that maximise broker trail commission income”.
While CBA said that the CIF package would ameliorate some of the conflicts of interest issues, it suggested that the CIF’s scope of action was “limited by the mechanisms through which it can work. In particular, the CIF’s ability to co-ordinate an industry-wide response is limited by regulatory and competition law limitations”.
The bank concluded: “As uniform change is key to the effectiveness of reforms, in CBA’s view, legal or regulatory changes will be needed to bring about some important changes.”
Likewise, at an event in Sydney last week, Westpac CEO Brian Hartzer noted the ongoing Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and its focus on commissions said that “increased transparency around broker commissions, fees and costs would help consumers to make more informed choices” around mortgage broking.
Mr Hartzer added that “one option that could be considered would be for brokers to charge customers directly for their services”.
Indeed, in the bank’s response to the royal commission’s closing statements, it stated further that Westpac is in favour of greater transparency and disclosure around “the commissions and fees paid to brokers and the effect of those commissions and fees on the ultimate charge to the customer”.
It reads: “The commission may also consider whether brokers charging customers directly for their services might enhance transparency and competition for customers.”
It suggested that this type of model would be more agreeable than moving to an upfront flat fee paid for by the lender.
The submission reads: “Westpac does not consider that remuneration based on upfront and trailing commissions necessarily leads to poor customer outcomes, but considers the issue involves a slightly more complex interplay between the structure of the payment, the manner in which it is disclosed to the customer and the current mechanism of indirect payment by financiers to the broker instead of payment direct by the customer to the broker for their services.”
In response to the commission’s question over whether upfront and trailing commission should be replaced by an upfront flat fee, the big four bank warned that introducing a fee “absorbed by the financier as part of the overall mortgage costs” could have “potential adverse customer outcomes”.
Some examples of these potential consequences included:
- “Customers would likely be charged higher upfront costs than today, which might make it more difficult for some customers to access finance.
- “Brokers may encourage customers to change lenders in circumstances where that is not in the customer’s interests in order to earn multiple upfront flat-fee payments.
- “Absent trailing commissions, brokers may have less interest in ongoing customer service and ensuring that a customer continues to meet their ongoing obligations under the loan, potentially leading more customers to have difficulty servicing their loans.
- “Brokers may be discouraged from facilitating more complicated or time-consuming lending. This may have a particular impact on support for first home buyers, who typically require more upfront effort from brokers.”
The bank concluded: “Many of those issues would be less pronounced if the ‘upfront’ fee was paid direct to brokers by the customers rather than indirectly through the financier.”
However, it noted that “potential second-order impacts of this type of structural change would need to be considered carefully”.
In conclusion, the bank said that it “recognises the potential for conflicts; however, it does not consider that current remuneration structures necessarily result in poor customer outcomes”.
“It remains of the view that implementation of the Sedgwick review recommendations, and other industry reforms, is likely to reduce further the risk of conflicts involving brokers and rebuild trust in the industry,” it said.
Several members of the industry have vocally dismissed the notion of moving to a flat fee or fee-for-service model, with the Combined Industry Forum recently warning the Productivity Commission of the “unintended consequences” of introducing a fee-for-service model for brokers.
ANZ did not refer to mortgage broker remuneration changes in its response.