Submissions in response to ASIC’s Review of Mortgage Broker Remuneration close on Friday (30 June) with some questioning whether the process is staying true to the spirit of the Future of Financial Advice (FoFA) reforms.
The review was undertaken as part of the Government's response to the Financial System Inquiry (FSI) with ASIC asked to conduct an industry-wide review of mortgage broker remuneration.
The regulator concluded in March that “mortgage broker remuneration and ownership structures create conflicts of interest that may contribute to poor consumer outcomes” and put forward several ideas aimed at improving customer outcomes. The industry was given until the end of June to respond.
While the initial review revealed much about the operation of the mortgage market, according to consultant Rice Warner, it also “documented a number of worrisome features”.
Bias towards specific lenders
Unsurprisingly, the issues identified in respect of the remuneration structures of the mortgage market, especially commissions, are strikingly similar to those previously identified with respect to the provision of financial and life insurance advice. These include:
- The levels of commission.
- The payment of trail commissions, in some instances for many years, when no service is being provided by the broker to the consumer.
- Conflicted remuneration in the form of volume and other bonuses.
- Conflicted remuneration in the form of soft dollar payments.
- The capacity of conflicted remuneration to influence product recommendations including the type and size of loan and the choice of lender.
“A particularly worrisome issue identified was the capacity of the commission system to bias broker recommendations towards bigger loans and also towards interest only loans – which allow customers to borrow more for the same monthly repayment. This is a bias towards higher risk for the consumer and the banking system,” said a Rice Warner analysis.
“The system also appears to provide a bias towards specific lenders with evidence provided that lender-controlled aggregators favour that lender. Commission is paid by lenders to procure and retain business which acts to put the consumer’s interests behind those of the lender.
“This conflict is an intrinsic feature of the commission mode. It is difficult to see how paying trail commissions without any requirement or need for ongoing service can be in the best interests of consumers.”
ASIC has made three proposals for the reform of remuneration structures including improving the commission model, and moving away from volume bonuses and soft dollar payments.
“Unfortunately, these proposals do not contain any firm recommendations. They simply defer to the Australian Bankers Association review into remuneration structures currently underway. We believe that this is insufficient and that ASIC should have articulated firm principles that it expects to be implemented,” said Rice Warner.
“In our view the principles and provisions established by the Future of Financial Advice reforms in respect of remuneration, and especially conflicted remuneration, should be the benchmark upon which ASIC should be insisting.”
Best interest duty
The financial consultant is also of the view that the ASIC report has avoided a significant issue: the form and quality of advice provided to borrowers. Mortgages are almost always associated with the acquisition of a long-term asset – either directly by purchasing a residential or business property, or indirectly by using collateral in a property to invest in other assets.
“We do not consider that brokers can act in the best interests of consumers if mortgages are assessed and advised similarly to consumer credit products with a focus on short term income and expenditure. This is particularly the case given the Review’s finding that brokers and lenders did not make sufficient enquiries into consumers’ expenses,” said Rice Warner.
“We believe that consumers’ interests would be best served by reclassifying mortgages as Financial Products in terms of the Corporations Act. This would immediately and definitively address the issues related to the levels of remuneration and the conflicts of remuneration.
“It would also address the quality of advice, the qualifications of brokers, the oversight and disclosure regime, and the need to act in consumers’ best interests. It would also recognise mortgages for what they are, long-term financial instruments, and not simply consumer credit.”
A recent Deloitte survey for the Mortgage and Finance Association of Australia (MFAA) revealed that while customer satisfaction is almost universal, one in every two clients do not understand how their broker makes money from their mortgage.