Consumer advocacy group Choice has called on the royal banking commission to look into the impact of broker commissions on consumer outcomes, urging for special scrutiny of trail commissions.
In its public submission, Choice said the commission should use its powers to compel banks and lenders to provide evidence behind high fees and “harmful practices”, including what service mortgage customers receive when brokers are paid commissions.
The submission comes a week before the royal commission holds its initial public hearing on Monday, 12 February.
The group’s CEO, Alan Kirkland, said the evidence will be crucial in making the case to end what he calls “the cycle of misconduct, apologies and delay”.
“The banks have spent the summer holidays explaining away past misconduct and promising to do better next time. It’s a story we’ve heard before, misconduct, followed by repentance, followed by more misconduct,” said Kirkland.
Choice expressed doubt consumers are getting any service from brokers who receive trail commissions on loans they arrange until the consumer switches products.
It prodded the commission to examine the impact of commissions – particularly trail commissions – on the quality of consumer outcomes. It said trail commission payments offer no clear benefit to consumers and instead benefit brokers, aggregators and lenders.
“For consumers, there is some implication that trail accounts for service delivered by the broker over the life of a loan. It is incredibly unclear what service is being delivered – any assessment about whether other options are better suited to a client during the life of a loan could be covered through one-off fees based on time actually spent assisting the client rather than the opaque high-costs of trail commissions,” it said.
Trail commissions are most perverse in the business of buying and selling of mortgage loan books, said the group. Besides the lack of benefit, consumers also face the possibility of additional service being removed when these sales happen.
Choice also aired its concern that some consumers do not get the service they expect when seeing a mortgage broker.
“Advertisements for brokers claim that they will find customers the right loan, provide tailored advice or get a great loan for the client. However, their actual obligation to clients is quite low – brokers have to help arrange a ‘not unsuitable’ loan.”
This echoes what the Productivity Commission had said in its draft report on competition in financial services released on 7 February. The commission pointed out that under the NCCP, brokers are only required not to suggest unsuitable loans to consumers, rather than act in their best interests.
In response, the MFAA said that the Combined Industry Forum has 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 MFAA CEO Mike 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.”
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