Mortgages are not simple consumer credit products and broker commissions create a poor alignment between broker and consumer interests, according to one independent financial consultancy.
These sentiments come from a Treasury submission sent by research firm Rice Warner on the Australian Securities & Investments Commission’s (ASIC’s) review of mortgage broker remuneration.
The submission, which was prepared by senior consultant Alun Stevens and peer reviewed by CEO Michael Rice, suggested that the duties and remuneration structure of mortgage brokers be brought into alignment with those of financial planners implemented after the Future of Financial Advice (FOFA) reforms.
In the current process to determine how broker remuneration should work, Rice Warner recommended that “the principles and provisions established by the [FOFA] reforms in respect of remuneration, and especially conflicted remuneration, should be the industry benchmark”.
The firm proposed outlawing commissions, claiming they created “a poor alignment of interests”.
“Mortgage brokers would be able to charge an establishment fee which could be charged at the time of the transaction. Trail commissions make no sense for consumers,” Stevens wrote.
“We consider that trail commissions should not be paid when no service is being provided.”
The firm also recommended a ‘Best Interests’ duty for brokers and aggregators which was equivalent to that imposed on financial advisers.
“Financial advisers and mortgage brokers give advice that impacts on the long-term financial positions of their clients and they should have equal obligations to act in those clients’ best interests.”
“We believe that the lack of formal ‘Know Your Client’ obligations that properly recognise the long-term nature of mortgages is a deficiency that should be remedied. Mortgages are long-term financial commitments that impact on all other long term financial plans and need to be recognised as such.”
Consumer interests could best be served by reclassifying mortgages as financial products, Stevens wrote, as this would “immediately and definitively” resolve issues related to conflicts of interest around remuneration.
“It would also address the quality of advice, the qualifications of brokers, the oversight and disclosure regime, and the need to act in consumers’ best interests. It would also recognise mortgages for what they are, long-term financial instruments, and not simply consumer credit.”
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