Brokers cry foul over scathing report

by Manuelita Contreras08 Feb 2018
The Productivity Commission has made some biting remarks about the mortgage broking industry, stopping short of saying that brokers are not acting in the best interests of their clients.

In its draft report on competition in financial services released yesterday (7 February), the commission said the mortgage broking market’s structure does not resemble one that is fully competitive as it once did in the 1990s.

Singling out mortgage brokers, it said nothing obliges them to act in their clients’ best interests and that their growth does not seem to have increased price competition. It pointed out that under the NCCP, brokers are only required not to suggest unsuitable loans to consumers, rather than act in their best interests.

"Undesirably for the dominant form of home loan origination, the financial incentives of brokers are skewed in favour of the banks that pay them," said the commission. 

With mortgage brokers paid by lenders through commissions, they can face conflicts of interest when the most suitable loan for a consumer is not the one that pays the most commission.

The report went on to say that the mortgage broking revolution is now part of the establishment and that non-transparent fees and trailing commissions, as well as conflicts of interest created by ownership, are inherent.

Recommending that aggregators and brokers owned by lenders be required to have a duty to act in consumers’ best interests, the commission said lenders’ ownership of aggregators exacerbates potential conflicts of interest for brokers. It also carries the risk that consumers have an illusion of choice, rather than a genuine one, in the market. 

“In particular, the commission structure by which brokers are paid, combined with any incentives related to aggregator ownership, may mean that home loan options presented to consumers are limited,” said the commission.

The mortgage broking industry is not taking these statements sitting down.

The MFAA said the report’s authors have failed to understand the reasons why consumers engage brokers to act on their behalf, and ignore the value mortgage brokers have brought to the Australian economy.

It expressed concern that the report has called brokers’ motives into question at a time when the industry has already been the subject of intense scrutiny by financial regulators. 

“We have been through ASIC’s Broker Remuneration Review and the ABA Sedgwick Review, neither of which found evidence of systemic harm to consumers,” said MFAA CEO Mike Felton.

Calling the authors' comments “really disappointing”, FBAA executive director Peter White said the commission should not take isolated and limited cases of wrongdoing and say they are systemic across the industry. 

“Whoever conducted this research has not really done the right level of research and due diligence,” he said.

He pointed out that it was the broking industry that brought competition into the mortgage market and it was through brokers that price competition and product innovation came about from the early to mid-90s through the 2000s.

“If you took the broker out of the market, if we would go back to 30 years ago, margins would go up, there would be no innovation,” said White in an interview with Australian Broker.

On the issue of ownership and potential conflicts of interest, he said it is an area that banks have already commented on within the ASIC remuneration review last year.

“And through the Combined Industry Forum, we’ve actually broadened that disclosure piece to deal with some potential concerns over vertical integration and white-labelling and ownership,” said White.

The MFAA said the commission’s report does not acknowledge the reforms already put forward by the CIF that were designed to further strengthen customer outcomes. 

Felton said brokers are already required by law to recommend a ‘not unsuitable’ loan for customers and that the CIF has proactively proposed that the industry go above and beyond what is required by the current legislation.

“We have defined a ‘Good Customer Outcome’ as ‘the customer has obtained a loan that is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan’,” said Felton.

“This provides the objective of all the CIF’s proposed reforms, and the benchmark which the industry will use to assess ourselves against in the future.”

The commission will submit its final report on 1 July 2018. The draft report is now open for comments and submissions until 20 March.

Related stories:
CIF to update commission model by 2018
Commission should recognise ASIC review: AFG 
The ASIC rem review: What happens next?

COMMENTS

  • by John 8/02/2018 8:49:20 AM

    More competition in the 1990's. What did they base this on?

  • by Confused. 8/02/2018 8:55:48 AM

    Refer to Mortgage Choice “paid the same”. Their payment model is based on all franchises receiving the same percentage of commissions regardless of the Lender or loan type. Their loan writers are not driven to a lender because of the commissions. Why isn’t more made of this? Why isn’t it celebrated as gold standard? Is it because bad or dark news sells better?

  • by Not Confused 8/02/2018 9:42:09 AM

    It appears that these Government Forums are at loggerheads with each other. When the head of ASIC comes out and applauds the work brokers do for their clients another "Commission" ( interesting title) suggests the opposite.
    In reference to the draft report:
    * I would suggest the greater majority of Mortgage Brokers just make ends meet, or, not even
    * Clients are made aware of how commissions are earned and distributed via the Credit Proposal Disclosure
    * Brokers offer a choice of lender and invariably it is the circumstances of the client that dictate their choice of one lender
    * Trail normally would pay for the after sales service which is vast and non revenue generating. Up to 40% of working time is spent willingly addressing client needs AFTER the loan has settled.Larger brokers would hire individuals (job creation) to deal with the clients needs and trail assist in offering this service. Non revenue generating processes could be pushed back to the lenders which, in turn, would increase their costs and, consequently, the clients may be negatively affect .
    * Can we assume, that if a client approached a lender, would said lender advise them to go to another lender who has a better ,more suitable loan???
    * if the lenders did not pay a broker commission would they pass on this made up 16 basis points to the client? If you believe the answer to be yes then I have a Harbour Bridge I may be able to sell to you (at a discounted price of course).

    After 46 years in finance at the highest level I can honestly say I have not witnessed a more stressful role than that of a Mortgage Broker. Especially dealing with lenders to assist in meeting or exceeding the clients needs and objectives
    Finally, I understand many of these "commissions" ( there is that word again) need to justify their role ( no point producing something positive as it would not have a "shock jock" affect) however I would suggest they look at what affect it has on the industry that serves the public and actually how they look when much of the report is non factual.
    I would suggest there is a role at UBS once you have finished this assignment