The final report on the Retail Banking Remuneration Review released yesterday
(19 April) contained 21 recommendations made to banks with regards to remuneration practices – three of which directly related to mortgage brokers.
Recommendation 18 suggested that banks adopt a remuneration structure for aggregators and brokers that does not directly link payments to loan size. Rather, the review proposed a “holistic approach” to performance management.
“Some argued to the review that loan size and loan complexity are correlated, providing a justification for current arrangements,” Stephen Sedgwick AO, head of the review, said in regards to submissions made on the release of the review’s Issues Paper in January
“More persuasive to me were arguments that loan complexity, and thus the effort required by mortgage brokers to secure a loan on behalf of the consumer, may be more closely correlated with the characteristics of the borrower.”
Sedgwick proposed a fee for service model paid by the bank as an alternative to value-related commission. This could be set as a flat amount or related to the characteristics of the borrower, he said. A client-funded fee was not recommended in the review.
“I therefore propose that the banks with a significant recourse to the mortgage broker channel move to investigate and, as soon as possible, adopt an alternative payment system with strong oversight by ASIC.”
Recommendation 16 of the review also included a number of other changes to third party remuneration structures including the elimination of:
- Volume-based incentives that are additional to upfront and trail commissions
- Non-transparent soft dollar payments in favour of more transparent methods to support training, etc
- Increased incentives for brokers engaging in sales campaigns
“These proposals are intended to improve transparency and reduce the risk (actual or perceived) that such payments increase the risk of mis-selling. Each of these payments is unrelated to the effort required by the broker to service a potential borrower’s needs,” Sedgwick said.
To move forward with this, a commercial negotiation between lender and brokers has been suggested to ensure brokers are compensated for the effort required to invest in any necessary systems with all changes preserving competition of the mortgage market, Sedgwick said.
“In broad terms, average remuneration per brokered mortgage may not be dramatically different to the current remuneration, but the risks (perceived and actual) of poor customer outcomes would be reduced. I would envisage that some form of trail payments would continue, with trails under existing arrangements ‘grandfathered’.”
Lastly, Recommendation 17 proposed that banks adopt an “end to end” approach to the governance of mortgage brokers that “approximates as closely as possible a holistic approach broadly equivalent to that proposed for the performance management of equivalent retail bank staff.”
To establish these recommendations in a timely fashion, Sedgwick said banks with a “significant recourse to the mortgage broker channel” should report regularly to ASIC on their progress. ASIC and other regulators would have enhanced oversight to monitor market responses.
“This recommendation is addressed to each bank individually, but particularly to the largest banks and to banks with an ownership interest in an aggregator (ie vertically integrated).”
Both major and non-major banks have come out supporting the recommendations found in the review.
CBA chief executive Ian Narev
said the bank will implement many of the review’s recommendations by 1 July 2017 with all changes in place by next financial year.
“The reforms necessary to implement Mr. Sedgwick’s recommendations are wide-ranging and significant. The recommendations affect all of our customer-facing teams, including branch, call centres, and mortgage brokers. Implementing them will require extensive consultation across a range of stakeholders, which we will commence immediately,” CBA group executive of retail banking services Matt Comyn said.
“This review is an important step for the industry to continue to restore community trust and we are committed to implementing these recommendations as quickly as possible,” group executive for Australia at ANZ Fred Ohlsson said.
ANZ said it will work closely with both the broker industry and relevant regulators to implement the recommendations.
NAB announced it would implement the recommendations prior to the 2020 deadline and promised that any changes to third party remuneration would be viable and competitive.
“We see mortgage brokers and other third parties as an important part of the future of our business. We will be working closely with the industry, treasury and with the regulators, ASIC and the ACCC, to make sure we get the right result for our customers and the industry,” NAB chief customer officer, consumer banking and wealth, Andrew Hagger said.
Managing director Mike Hirst of Bendigo and Adelaide Bank said the recommendations showed the bank already operated in a manner supporting the right consumer outcomes.
“We thank Mr. Sedgwick and his team for conducting a thorough independent review. We will proceed with full implementation of all recommendations and will support swift industry action, which we expect to have a lasting and positive impact for Australians.”
Suncorp Banking and Wealth CEO David Carter had a similar sentiment, saying that the recommendations echoed the approach his bank was already taking.
“Ultimately, Suncorp’s goal is to create value for our customers and we recognise the important role that mortgage brokers play in providing choice for our customers.
“We will continue to work with the ACCC and ASIC as well as industry associations, aggregators and brokers to develop a response that serves the best interests of customers and the future of our industry.”
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