ASIC voices concerns over broker commission model

by Miklos Bolza17 Mar 2017
The Australian Securities and Investments Commission (ASIC) has recommended that lenders stop incentivising brokers based purely on the size of the loan.

“The standard commission model of upfront and trail commissions could encourage brokers to place consumers in larger loans, even when this may not be in the interests of the consumer,” the regulator writes in its Review of Mortgage Broker Remuneration.

An example of this is a lender reflecting the LVR of the loan as well as other considerations such as compliance metrics in how they calculate upfront and trail commissions.

ASIC also proposes that incentives are not structured in a manner that encourages brokers to create larger loans which initially have large offset balances.

It is also suggested that the results of this review are combined with the Australian Bankers’ Association’s (ABA’s) review of incentives paid to staff and third parties within banks.

“The ABA review, which is being conducted by Stephen Sedgwick AO, provides an opportunity for the banking industry to re-consider the standard commission model. The ABA and other stakeholders – including other lenders and brokers – should consider how they can work together to respond to this proposal.”

Volume-based payments

Within its broker remuneration review, ASIC also proposes a shift away from bonus commissions and bonus payments.

“While bonus commissions and bonus payments do not necessarily cause poor consumer outcomes, they are a form of remuneration structure that creates a higher risk that brokers will place consumers with lenders for the wrong reasons.”

ASIC noted that concerns about bonus commissions have already been raised in other parts of the financial services industry, for instance with the prohibition of volume-based commissions by the Future of Financial Advice (FOFA) reforms which are now being extended into the life insurance industry.

“We consider that the risks posed by bonus commissions (eg volume-based commissions) in other parts of the financial services industry also apply in the home loan market. Accordingly, we propose that the industry moves away from bonus commissions and bonus payments.”

The banks could also act on this proposal through the ongoing ABA review, ASIC added.

Soft incentives

The regulator also found that soft dollar benefits increased the risk of poor consumer outcomes.

“Like bonus commissions, soft dollar benefits have been prohibited in other parts of the financial services industry under the FOFA reforms. We therefore propose that the industry moves away from giving soft dollar benefits.”

As before, the ABA review also gives banks the opportunity to act on this suggestion.

Disclosure

ASIC recommended that advisors and mortgage brokers more clearly disclose ownership structures in order to reduce their impact on competition in the mortgage market.

“We consider that clearer disclosure of ownership structures should extend beyond mortgage brokers and apply to all players in the home loan distribution chain, including lenders, aggregators, and brokers.”

This disclosure should appear in all marketing material and distribution points such as websites and physical office spaces.

Public reporting

A new public reporting regime has also been proposed to improve transparency in the mortgage broking space. ASIC suggested the following information be made public:
  1. The value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied
  2. The average pricing of home loans that brokers obtain on behalf of consumers
  3. The average pricing of home loans provided by lenders according to each distribution channel
  4. The distribution of loans by brokers between lenders to give consumers a better indication of the range of loans that brokers within the network offer
Australian Broker’s sister title MPA will be hosting a LIVE Q&A on their website from 10am today, where you’ll be able to ask any questions you might have.

Related stories:

ASIC reveals six proposals in broker remuneration review

ASIC briefs O’Dwyer on remuneration review

“Don’t be shy about putting your voice forward,” says Suncorp

COMMENTS

  • by unfair 17/03/2017 1:27:59 PM

    It's quite interesting when you look deeper, this started from the financial system inquiry, which the government responded to by instructing ASIC to do the review. If you look at who is on the panel of the financial systems inquiry... there are 3 big shots on there that were previously bank directors etc... ie, CBA, westpac, AMP etc.

  • by A Disillusioned Broker 19/03/2017 10:40:52 PM

    I cannot find one thing in this report that would result in an improved outcome for my clients or my business.

    This is hardly an impartial report, it is a seriously biased stitch-up ( ordered by ex-NAB executive Kelly O ‘Dwyer in cahoots with the three ex CBA, Westpac and AMP bank executives that are on the Financial System Enquiry panel ) that the ABA may as well have written on behalf of ASIC, as all is does is shoot down the unbroken pay for performance, long established commission model at every opportunity – it has nothing whatsoever to do with Brokers clients satisfaction levels or the current outcomes that Brokers achieve for their loyal clients.

    Many of these orchestrated “findings” contained in this report defy logic, basic common sense and are based on unsubstantiated and paranoid what if’s – that may or could occur in the future and assumes that all Brokers are just self-serving commission hungry rogues that ignore the current laws ,compliance regime and that we don’t put our loyal clients first.

    Point #1 – Improving the standard commission model for Broker – what they mean is “improving” the standard commission model for lenders , resulting in less income for Brokers.

    The rest of this report is largely irrelevant dribble won’t make much, if any, difference to consumers - what it will do is increase my stationary costs and waste more of my time. I won’t miss the holidays to L.A , Hawaii or the Caribbean, or the soft dollar commissions as I have never been a part of any of these perks. My Aggregator actually charges us to attend their annual conference.

    Like most self-employed people we get paid on performance, and volumes written has always been a measure of that success as it should be, LVR and loan complexity is irrelevant from a payment perspective and if these peanuts at ASIC really believe that Brokers write larger loans so that a Broker can be paid more is, then God help us all , as we all know that this is pure fantasy as clients have the ability to think for themselves ,set their own budgets when making purchasing decisions , and they are the party that ultimately decides the preferred loan amount , not us.

    Loans sizes are just a matter of fact statistic, however I will give ASIC an insightful tip though – larger loans are usually linked to people with above average incomes who purchase above average priced properties, an amazing revelation ha ! – and these clients probably use Brokers as they can’t be bothered wasting their precious time getting biased product advice along with the substandard and disjointed service on offer at the banks.

    I have a strong suspicion that countless professions earn more on bigger jobs than smaller jobs – should all their incomes be interfered and tampered with by ASIC too?

    This ASIC report is an extremely biased and inaccurate assessment of our industry that is basically written with the end in mind, all designed from the outset to satisfy the bank driven agenda of driving down commissions. It is obvious why the bureaucrats that prepare these fictional reports are not small business operators!

    It is likely that any reductions in commissions will result in and industry wide fee for service levy to make up any shortfall, perhaps ASIC can also advise how this will result in better consumer outcomes.

    I look forward to the formal response to ASIC from the FBAA ( less so from the bank sponsored MFAA) not that ASIC will be paying too much attention to whatever feedback they receive ,as it appears the outcome of reducing Brokers income has already been decided , just as the banks have ordered.

    As a veteran of this industry I would not recommended that anyone consider joining it.


  • by Kate 23/03/2017 11:46:26 PM

    I don't think you are right .... for a million. Dollar loan you as broker get 6 000.00 in commission and another 150.00 a month per life.
    You tell me this ... these are from people whom most of the r just in it for the money and due to this create so much doggy transaction due to the incredibly high pay .
    I bet you if asic runs a whole vic check , both the broker anthe banks are in trouble .