Legislating for the provision of standardised commissions could help eliminate conflicts that encourage lenders to use commissions as a “tool to influence brokers”, according to the Australian Finance Group.
In response to the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Australian Finance Group (AFG) submitted that the introduction of a standardised commission model in the broking industry could “prevent lenders from competing for brokers rather than competing for consumers”.
The mortgage aggregator said that it recognises that “there have been circumstances where lenders have sought to use commissions as a tool to influence brokers” into preferring their products, as identified by the Australian Securities and Investments Commission (ASIC) in its broker remuneration review.
“[A] change that could be considered to prevent lenders from competing for brokers, rather than competing for consumers by providing better products and services, would be to legislate for the provision of standardised commission rates,” AFG said.
“Such an approach would go a long way towards eliminating the ‘lender choice conflict’ identified by ASIC.”
AFG’s submission follows on from views expressed by Suncorp Group in its submission to the royal commission, where it said that the “introduction of a system of standardised payments to brokers” may remove incentives that “could cause bias” among brokers for lenders with higher upfront and trail commission rates.
“Brokers could be paid an industry-standard percentage or fixed amount for each loan (of the same type; for example, owner-occupier or investor, lower or higher loan-to-value ratio) brokered by them irrespective of the lender,” Suncorp said.
“This would remove the possibility of brokers being incentivised to prefer the bank which paid the highest commission and instead provide a simple, transparent system of broker commissions that is easy for customers to understand.”
“Fees for service” model would exacerbate banking “oligopoly”
Although noting the benefits of a standardised commission model, AFG warned the royal commission against a move to introduce a “consumer pays” model in the broking industry.
The major aggregator made reference to the Productivity Commission’s final report following its review into competition in the Australian financial system.
The PC said in its final report: “[Fees for service] paid by consumers are unlikely to be pro-competitive, because a lack of willingness to pay is likely to result in a smaller mortgage broking industry, and the greater damage would be to the lenders without branch networks.
“Given that many mid-sized and smaller lenders rely on brokers to compete, competition in the home loan market would likely be weaker as a result.”
In its submission, AFG added that such a model would strengthen the banking “oligopoly”.
“Consistent with the concerns expressed by the Productivity Commission, it is AFG’s fear that a fees-for-service model paid for by consumers would result in the major banks with large branch networks increasing their oligopoly powers to the detriment of all Australian borrowers,” the aggregator stated.