Broking institutions should be “separately owned” from the institutions that “originate the products they sell” and should be “individually licensed” to improve accountability, the Australian Greens party has told the financial services royal commission.
In its submission to the financial services royal commission, the Australian Greens party has called for an end to vertical and horizontal integration in the financial sector, echoing comments made by the Productivity Commission (PC) in its draft report on competition in the Australian financial system.
In light of questions of “agency” raised by Commissioner Kenneth Hayne in his interim report, the Greens have alleged that brokers who operate under vertically integrated entities are “owned” by the bank.
“Within vertically and horizontally integrated major banks, mortgage brokers are owned by the very banks whose loans they are recommending, and these banks then securitise these mortgages and on-sell them through in-house brokers,” the minor party said.
“Not surprisingly, they [banks] have been happy to write home loans to anyone with a pulse. This is the natural response of institutions who are the beneficiaries of implicit and explicit government guarantees that underwrite this model, as well as tax settings that create incentives to invest in housing, and regulatory settings that create incentives to lend for housing.”
The Greens claimed that intermediaries of “retail-grade” products, including mortgage brokers, “should be separately owned from the institutions who originate the products they sell”.
However, speaking to The Adviser, managing director of the Finance Brokers Association of Australia (FBAA) Peter White said: "Mortgage brokers are providing credit assistance to someone wanting a loan and are assisting them through a process, so ownership, so long as it is clearly discussed and doesn’t influence the outcome for the borrower, makes no difference."*
The Greens also submitted that retail-grade intermediaries “should be individually licensed so as make them individually accountable”, adding that intermediaries “should be required to hold professional indemnity insurance”.
Greens call for ban on value-based commissions
Further, in its submission, the political party urged Commissioner Hayne to recommend the “prohibition” of value-based commissions and said that intermediaries “should be subject to a best interest duty in the same way that product producers are”.
“The [royal commission] should recommend a clean slate for commissions on all past, present and future sales of banking, superannuation, insurance or any other retail-grade products.
“Value-based commissions for all retail-grade products should be prohibited, including ending the current carve-outs for certain products, and ending the grandfathering of subsequently banned commissions.”
*However, Mr White rejected the Greens' call for a ban on broker commissions, stating that the industry and regulators alike are yet to propose an alternative model that "works better".
"Commissions paid to brokers and all options around this subject have been looked at by everyone, and no-one has a solution that works any better, in fact some considered structures result in worse outcomes for borrowers," Mr White said.
"So, in home loans, they are most appropriate to stay as they are noting the recent adjustments under the Combined Industry Forum’s outcomes in removing volume bonuses and soft dollar commissions."
The Greens’ claim follows an assertion by Commissioner Hayne in his interim report that lenders paying value-based commissions to brokers “might” be in breach of their obligations under the National Consumer Credit Protection Act (NCCP), which requires lenders to have “adequate arrangements” in place to prevent conflicts of interest.
However, Mr White has since refuted Commissioner Hayne’s claims, stating that the interim report did not find any systemic evidence to suggest that conflict of interest in the payment of commissions to brokers directly disadvantages clients.
Mr White added that he believes licensees already have “adequate arrangements” in place to prevent conflicts of interest.
The FBAA head continued: “The commissioner pointed out that a breach of the NCCP is not an offence or open to civil penalty.
“I would argue that the cancellation or suspension of a broker’s licence by ASIC is a substantial penalty in itself.”
* The story was updated on 1 November 2018 to include comments from managing director of the FBAA Peter White.