Industry needs to strike a balance with compliance

by Otiena Ellwand01 Nov 2017
Brokers’ compliance responsibilities keep piling up, and yet with the industry deliberating over how to proceed with ASIC’s many recommendations, there doesn’t seem to be an end in sight. But is all this compliance necessary?

When Anthony Knight, principal at Mortgage Choice in Erina, started as a mortgage broker 20 years ago, an average residential loan application took him about two hours to complete. Today, applications can take about seven to eight hours each.

SMSF loans are even more time-consuming. A recent application Knight completed for a $450,000 loan included 300 pages of documents. One email had 23 attachments.

Part of the reason it takes so much longer for brokers to complete a loan application these days is the significant increase in compliance requirements, a trend that is not going away. How the industry moves forward with the recommendations of ASIC’s Review of Mortgage Broker Remuneration report will partly shape how much more oversight and compliance brokers will have to contend with in the future.

While compliance can be time-consuming, one industry association says it is integral to improving the trust and confidence of consumers and regulators for long-term industry sustainability. But with no obvious end in sight to the amount of work involved, some brokers are wondering whether too much compliance could backfire.

Effective compliance is essential
MFAA CEO Mike Felton has a measured perspective on compliance. He recognises its importance in ensuring brokers do the right thing by their customers and protect their businesses from undue risks. At the same time, he acknowledges that it can be costly in terms of the ‘time equals money’ equation. But he also knows that it’s here to stay.

“As our industry grows and matures, we are seeing increased regulation and external reviews aimed at improving consumer outcomes. These will inevitably lead to increased compliance obligations,” Felton told Australian Broker.

He points to ASIC’s report on interest-only lending from September 2016, which highlighted that there was room for improvement in how brokers were demonstrating that interest-only products met consumers’ requirements and goals.

The report suggested that brokers record a concise narrative summary of a consumer’s requirements and objectives and explain why a product and lender were chosen, to reduce the risk of being deemed non-compliant. It also recommended brokers provide that information to the borrower to demonstrate their understanding of the consumer’s needs and confirm that with their client.

ANZ has taken heed of the directive. It recently released a 10-page “customer interview guide” for brokers, which outlines its minimum requirements for how brokers should be documenting conversations with borrowers. This prompts brokers to ask clients about their Netflix and Spotify subscriptions, as well as their alcohol, tobacco and gambling habits, to get a better understanding of their real living expenses.

The guide “becomes a source of truth”, the bank said, which shows evidence of the broker’s conversation and can be referred to at any time by anyone to show there was justification for providing the client with a particular loan.

“In light of these reports and the ASIC interest-only review that is now underway, compliance will become more important than ever to protect our businesses, consumers and our industry,” Felton says.

The answer is not necessarily more compliance, but finding a way to make compliance effective and efficient without adding unnecessary red tape, a task the joint industry forum is working on as it moves towards self-regulation.

One thing is clear, Felton says: there are likely to be increased monitoring requirements going forward.

Compliance support
The sixth proposal of ASIC’s remuneration review addresses the oversight and governance of brokers. It suggests lenders and aggregators take a role in ensuring that brokers abide by consistent processes and reporting standards, and monitor their consumer outcomes.

At FAST, CEO Brendan Wright says the aggregator has introduced a raft of support strategies to help member brokers stay on top of compliance changes. Its partnership managers and credit advice consultants, and its business operating platform Podium, provide brokers with support and information to achieve their compliance objectives.

“The area for everybody to be mindful of is recording information. Everybody’s busy – the consumer, the broker, the lender – so just take the time to succinctly record the outcome for that particular client at that particular time. That’s where there is an opportunity to be consistent and disciplined in that space,” he says.

Knight says it’s a relief to him that the Mortgage Choice compliance team does the research and provides its brokers with a breakdown of the legislative analysis. The team tells brokers what to do and what new paperwork is required. The brokers then implement the changes into their workflow.

“I feel more comfortable having that backing and that expertise behind us to make sure we’re doing the right thing,” Knight says. “It would be very hard, I think, to sit there and work that out yourself. There’s no way in the world that you could make sure that you’re meeting with every legislative requirement without that backing.”

The MFAA provides advocacy, education, tools and consultation to improve and reduce its members’ compliance workload. It successfully lobbied the government to change its original proposal for the ASIC Industry Funding Model, which would have placed a significant compliance burden on its members. It’s also updated its preliminary credit assessment tool and other resources on verification.

Is compliance working?
One of the targeted areas that ASIC is looking at is responsible lending, and no one – not the big banks, brokers, aggregators or minor lenders – is exempt from scrutiny.

“That’s where brokers, for example, have completely separate obligations under the law than the actual lenders,” says Raj Venga, ombudsman of the Credit and Investments Ombudsman (CIO), which deals with consumer complaints related to financial services providers.

“The lender cannot rely on the broker entirely to do the responsible lending checks, and the broker cannot not do it and assume the lender will do it, because each of them is equally responsible.,” Venga says.

Only 6% of the complaints the CIO receives are against brokers and aggregators. Likewise, the Financial Ombudsman Service (FOS) says only 2% of its complaints are about brokers, aggregators, and mortgage managers. In comparison, 46% of CIO complaints are about residential lenders, and FOS has determined that 69% of its consumer credit disputes involved banks.

“There’s a low interest rate environment and the housing market has been going gangbusters for the last few years; you’d think that we would see a lot more bad behaviour, with people trying to capitalise on this market, but we’re not seeing it yet,” Venga says.

Felton says great improvements have been made over the past two years by both brokers and lenders in verifying income, expenditure and the suitability of products for customers.

“I have confidence that the vast majority of our brokers are doing the right thing by customers. Indeed, all the available data supports this. Where we need to improve is best practice in documentation and compliance so our members can always easily demonstrate that when required.”

Next steps forward
While the increase in compliance might have had a cleansing effect on the industry and forced some of the ‘cowboys’ out, Knight doesn’t think any more compliance is necessary.

“Unfortunately there’s been a knee-jerk reaction in regard to political pressure and lack of understanding of the role brokers play within the industry,” he says.

“It’s a point of trying to strike that balance between making an industry really struggle under the weight of legislation versus being able to allow them to go out and do the thing that 99.9% of them want to do, which is go out and help customers benefit from competition.

“I look forward to everyone catching their breath and realising where things are at and moving forward with a better balance in that regard.”