The Combined Industry Forum (CIF) has outlined a package of reforms, including proposed changes to the mortgage broking remuneration structure, which aim to reduce the potential for conflicts of interest and poor customer outcomes.
In the final report released to Treasury this week
, Improving Customer Outcomes: The Combined Industry Forum response to ASIC Report 516: Review of mortgage broker remuneration
, the CIF proposed that remuneration will relate to funds drawn down and utilised by the borrower.
This means upfront commissions will be paid on a “utilisation basis” dependent on:
- The facility limit drawn down
- The amount drawn down net of offset account balances (if a loan has an offset account)
Trail commission will be paid on the amortised drawn down amount net of offset account balances or based on facility utilised.
Funds drawn down will be measured and commission paid twice: first on initial settlement and then at a later point in time for subsequent drawn down amounts up to the maximum facility limit.
“If you draw down and place funds into offset, you won’t be paid commission on the funds going into offset, neither at the time it goes into offset or in the future,” Mike Felton
, CEO of the Mortgage & Finance Association of Australia (MFAA) told Australian Broker
“However if you take a facility limit and you draw down half the facility limit and then go back to draw further on the facility limit without using an offset account, you will be paid for future use.”
Whether brokers get less commission now will depend on how they structure their business, he added.
Felton noted that the commission change was the most difficult out of the six principles for the forum to flesh out.
“On the one hand, we had to address the key call outs from ASIC about not encouraging larger loans or having significant initial offset balances. On the other hand, we wanted to ensure that brokers are remunerated for the economic value that they produce.”
This final proposal was agreed upon after other remuneration structures such as fee-for-service, standardisation of upfront commissions, and base commissions paid on LVR were deemed to have unintended negative consequences on competition, consumer outcomes and the broker value proposition.
The forum expects these changes to upfront commissions to be implemented by the end of 2018.
In response to consumer group concerns about trail, the CIF also clarified when trial will be withheld in order to promote good consumer outcomes. These instances include when a loan is:
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- Sixty plus days in arrears
- Calculated using inaccurate information such that the customer receives a larger loan
- Refinanced or restructured, suggesting that it was not fit for purpose