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.”
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.
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.
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.
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:
- The value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied
- The average pricing of home loans that brokers obtain on behalf of consumers
- The average pricing of home loans provided by lenders according to each distribution channel
- 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.
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