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.
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