"On first glance, it appears the commission does not fully understand the finance broking sector" –FBAA
While the royal commission’s interim report has not clearly stated where it stands on upfront and trail commissions, it did say that value- and volume-based remuneration has contributed to misconduct in the sector.
“It will be important to consider whether value- and volume-based remuneration of intermediaries should be forbidden,” the report said.
In an interview with MPA, Home Loan Experts managing director Otto Dargan and Confidence Finance director Redom Syed both argued that brokers’ remuneration structure is sound.
According to Syed, the report may have shone a spotlight on cultural issues within the home loans sector that have led to poor consumer outcomes, but at this point it doesn’t recommend concrete policy changes or consider the broader implications of those changes on the industry.
“There’s little mention of the productivity downsides or financial stability consequences associated with change to lending frameworks,” Syed said. “Comments related to volume-based remuneration models fail to consider the model’s competitive benefits to consumer outcomes. Generally, a holistic policy analysis is completed before concrete recommendations are made.”
“We have had extensive dealings with Treasury, ASIC and the Productivity Commission about these issues and this report appears to be simply repeating the same things,” he said. “This is not a game changer for brokers.”
Dargan and his team similarly disagree with the royal commission’s findings that volume-based commissions lead to poor consumer outcomes.
In the report, the royal commission cites information from CBA and ASIC that found that value-based remuneration of brokers led to loans with higher LVRs, debt-to-income rations, and arrears.
Dargan argued that the information is misleading because it doesn’t consider the number of borrowers who approached a broker after a bank failed to meet their needs.
“Data provided by the MFAA clearly shows that borrowers tend to be satisfied with their experience with mortgage brokers. We put forward that the reasons for using a mortgage broker are different from the reasons for using a bank directly, and the data needs to be viewed in that context,” Dargan said.
His team believes the MFAA data indicates that borrows tend to get loans that better suit their needs from mortgage brokers than from other lenders that have limited products or a conservative risk appetite.
Dargan said evidence of potential poor customer outcomes brought about by volume-based commissions is lacking, but changing to another remuneration structure has the potential to cause significant problems. “It's easy to point out a potential problem, but it's much harder to come up with a better solution that doesn't introduce new problems,” Dargan said.
He said the introduction of CBA’s balanced scorecard, where borrowers can give feedback to mortgage brokers is key to improving the broking industry, and not a new remuneration structure.
Other issues left out
The royal commission raised many questions on responsible lending, brokers’ duties and obligations, remuneration and household living expenses.
But it’s important to keep in mind that they’re not the only issues dogging the industry, Dargan said. These include the standardisation of forms and processes; the need for greater oversight and vetting of referrers and referral agreements; improving the identification process of clients who can’t meet up in person; and the growing risks and complexities around data security and privacy.
“These should be discussed later between ASIC and the CIF if we are to have a broader discussion about better customer outcomes and a more efficient industry,” Dargan said.