Are brokers next in line for public scrutiny?

The major banks have never been so under fire from regulators, politicians and the public. Will brokers be next to feel the heat?

Are brokers next in line for public scrutiny?
It was meant to be smooth sailing for the banks.

Compared to the threat of a royal commission, a day out in Canberra addressing the Parliamentary Standing Committee on Economics looked to be a soft punishment for the banks under fire over BBSW rate rigging, financial advice and not passing on full RBA rate cuts. But what started out as smooth sailing quickly turned hostile.

“Structure a sentence for me,” said Liberal MP Scott Buchholz, addressing Commonwealth Bank CEO Ian Narev, “about how fairness fits into a 21.43% cash advance in that credit card space, because, to me,  that is gouging”.

Narev left Parliament having admitted that the bank’s explanation of its interest rate decision in August appeared “opaque” and was “overly technical”.

That was just day one. Over three days of questioning ANZ conceded that they would take “leadership” in reducing credit card rates, NAB made public its decision to stop funding political parties, and by the end of the week an irritated Brian Hartzer, CEO of Westpac, told his inquisitors that “it seems an interesting route to go down where governments were in the business of regulating what products were offered in the market”.

It’s rare to see major bank CEOs forced to publicly defend themselves en masse, yet the Standing Committee’s annual review of Australia’s four major banks is just the tip of the iceberg. The Australian Bankers’ Association (ABA) lists seven current reviews or regulations being considered by regulators and the government that could affect them (in addition to the ABA’s own review).

Yet brokers shouldn’t get too comfortable. What the ABA’s list doesn’t include is ASIC’s remuneration review, which will report in December. With the publication of that report approaching, MPA asks: in a political environment so hostile to banks, could brokers be next in line?

“One of the biggest mistakes we can make in banking is to look at default rates now, assume that they are going to continue, and price for those default rates”
 -  Ian Narev, Commonwealth Bank

Firstly, it should be noted that brokers were mentioned just once in the Standing Committee’s review, in a dead-end question about RAMS directed by Nationals MP Kevin Hogan at Westpac’s Brian Hartzer. The question led nowhere; indeed brokers got off extraordinarily lightly from the whole affair, given financial planners and the remuneration of branch staff were two big topics of discussion.

August’s cash rate cut and the banks’ reaction to it did take up much of the sessions, but it didn’t prompt any new responses from the banks that the market hadn’t already heard.

CBA’s Narev warned the committee that the current low default rate shouldn’t mean prices coming down. “One of the biggest mistakes we can make in banking is to look at default rates now, assume that they are going to continue, and price for those default rates,” Narev said. And Hartzer flatly denied the committee’s suggestion that Westpac’s interest rate was determined by the cash rate, emphasising the importance of wholesale and internal funding.

More interesting than the cash rate discussion were the resulting questions concerning tracker mortgages – mortgages that are directly indexed to the cash rate. Tracker mortgages are common in the UK and Europe but aren’t currently offered in Australia.

That could be about to change. ANZ CEO Shayne Elliot told the committee: “I think there is a very valid place for that product in Australia. In fact we have looked at it and we continue to look at it to see whether there would be a market proposition for us”. Narev also said CBA had “no specific objection” to tracker mortgages, although he noted that the take-up of these in the UK had recently fallen.

The problem with tracker mortgages, according to all the banks, is the cost. “Tracker mortgages are really quite fraught from a risk point of view, and we saw this in the GFC in particular,” explained Westpac’s Hartzer. The premium required to cover this risk would make a tracker mortgage more expensive than a standard variable rate, he said.

Tracker mortgages offer certainty for borrowers, but ANZ boss Elliot argued that fixed rates provided a better solution. “If people want certainty in Australia, they have tended to choose to have a fixed rate, so they do have an option of certainty. We are not convinced that there is a market to pay more
for certainty.”

Scrutiny is of course a double-edged sword, no more so than in the case of remuneration. During ASIC’s review, brokers have constantly argued that the remuneration of bank branch staff should also be investigated (ASIC confirmed this would be the case), and again and again the Standing Committee returned to the question of staff remuneration at board and branch levels.

Labor MP Matt Thistlethwaite questioned all four bankers on “the issue of the remuneration structures in your bank and incentivising products being pushed on customers when they may not be in their best interests”.

Asking about incentive breakdowns and incidences of missold products, Thistlethwaite was clearly trying to link staff remuneration and the inappropriate pushing of products. He was not alone in doing this, and remuneration also came into increasingly heated discussions about financial planning.

These questions had their desired effect, putting the bank chiefs on the defensive. Not only did the CEOs reveal their frontline employees’ compensation packages but they hurriedly insisted that pushing products wasn’t the main determinant of incentives. As CBA’s Narev put it, “at the core of everyone’s remuneration and assessment, from that time up until today, is customer satisfaction”. ANZ’s Elliot noted that “only a third” of incentives were related to selling products.

While the banks resolutely defended their right to offer products to customers, it’s clear the issue of branch staff remuneration is an embarrassing one for them. NAB CEO Andrew Thorburn told the committee, “I acknowledge more needs to be done in the area of product sales incentives.” NAB has looked to end incentives for branch staff poaching NAB Broker loans. And Westpac says it has removed incentives for tellers to sell products, without confirming whether it would extend this to the St.George Group.

Across all three days, one thing was abundantly clear: remuneration is a pain point for the major banks. They need some good news in this space, and so at the board level, curtailing broker commission could be seen as a way to show the public they’re taking action. A critical verdict on broker commission from ASIC could give them the licence to do just that.

“I think there is a very valid place for that [tracker mortgages] in Australia. In fact we have looked at it and we continue to look at it” - Shayne Elliot, ANZ

Barring some miraculous revival in the banks’ fortunes, Parliament’s annual review of Australia’s four major banks will be an ongoing, annual affair, presumably looking at other areas of financial services, including brokers.

A disturbing indication of how the broker channel might emerge from a parliamentary grilling came from the harsh questioning about financial planners. Recounting the many tragic cases of misconduct over the last few years, with pressing questions about how many planners had actually been sacked, the Standing Committee ensured this topic would be prominent in the news, and it was. From NAB’s 2.5% of financial planners sacked to CBA’s $11m in payouts for problematic financial advice, this topic overshadowed rate rises in attracting terrible publicity for the banks.

Clearly, brokers and financial planners are in quite different positions. Commercially, the major banks have good reasons to engage with brokers, and they do – most notably NAB’s reintegration of NAB Broker in September and its accompanying efforts to end channel conflict. The issue for bank CEOs is about control and publicity. Unlike investment products, mortgages have not inflicted much pain in recent years, but rising defaults in mining areas could change that. Add to that a critical ASIC review of commissions, and a few criminal cases involving brokers, and it’s not that difficult to imagine banks being criticised for their relationship with the third party channel.

Public and parliamentary scrutiny of the major banks is essential, revealing, and already appears to be creating better outcomes for consumers – a banking tribunal was announced the day after the sittings. Yet brokers must be aware of the pressure it puts on the banks to avoid controversy, and shouldn’t imagine the broker channel won’t be involved.

“I acknowledge more needs to be done in the area of product sales incentives” Andrew Thorburn, NAB