The Treasury has published banks’ and brokers’ views on commissions, and it turns out the two groups have much in common. Yet maintaining the status quo is far from a done deal, writes MPA editor Sam Richardson
Talk about an anti-climax. For the last few months, brokers, the media and industry experts have predicted that the banks would cut commissions. In August, UBS analyst Jonathan Mott wrote that CBA’s annual results put the bank “in a strong position to negotiate materially lower mortgage broker commissions consistent with the ASIC & Sedgwick reviews. We expect an announcement on lower broker commissions imminently”.
Yet nothing of the sort has occurred up to time of writing. The Treasury’s consultation period, following ASIC’s Review of Mortgage Broker Remuneration, provided banks a once-in-a-decade opportunity to propose commission cuts under the guise of protecting consumers. However, the submissions of CBA, NAB, Westpac and the Australian Bankers’ Association contained no major changes. CBA’s brief submission simply delegated responsibility. “We note and support the comments in the ABA’s submission regarding a self-regulating model,” it said. In turn, the ABA said “members have already made a public commitment to self-regulation”.
Prospects for self-regulation, through the Combined Industry Forum of the MFAA, the FBAA, the ABA, COBA and the Australian Finance Industry Association, appear brighter than ever. Kelly O’Dwyer, Minister for Revenue and Financial Services, has effectively endorsed the process. The forum also strengthened its legitimacy with the inclusion of consumer advocate groups, including CHOICE, that had previously complained about being excluded.
The participants are on board, the government is in support, and the forum is now entering its third round of meetings, but self-regulation has a long way to go.
How commissions could change
In order to respond to ASIC’s proposals, the Combined Industry Forum has split into six working groups. The ABA told MPA that these groups “are aligned with the six ASIC proposals and are responsible for preparing progress reports to the mortgage industry forum throughout September and October, which will inform the forum’s report to the federal government in November”.
Focusing on ASIC’s first proposal, to improve the standard commission model, there appear to be two potential flashpoints. The first is NAB’s proposal that upfront commission should be calculated based on the actual amount drawn down by a borrower, net of offset. The MFAA says this proposal is “unlikely to be suitable”, with possible consequences for construction loans and investors.
The MFAA would approve of such a move, however, if banks paid brokers an extra commission, six to 12 months in, based on the offset amount. The FBAA also says the proposal is possible, “although any such requirement would need to be subject to reasonable time frames or possibly a utilisation trigger that is based on more than mere settlement”.
Another problematic suggestion by NAB is that trail could be paid dependent on meeting ‘key performance indicators’. NAB said “these could include evidence of good quality ‘preliminary assessments’ and, where appropriate, ongoing service being provided to the customer to ensure all parties are aware of any change in the customer’s circumstances”.
The MFAA said that such a move was “potentially suitable but [with] unintended consequences”. Changes to trail could be supported by consumer advocates, whose submission to ASIC called for trail to be scrapped “as they offer no benefit to consumers”.
Many of the proposed commission changes that have kept brokers up at night look unlikely to be agreed by the forum, however. ASIC’s suggested commission-by-LVR model was rejected by the FBAA, NAB and Westpac, who warned the model “would be highly complex and would not necessarily result in better consumer outcomes”, as well as disadvantaging first home buyers. Beyond the consumer advocates – who remain peripheral within the forum – there seems to be little appetite for flat-fee models or a reduction in commissions.
Unknown quantities include ANZ – whose submission, if one was made, has not been made public – and the outcome of the Sedgwick review. The review called for commissions to be disconnected from loan size, but the banks and the ABA have been remarkably quiet about this proposal.
The ASIC question
The greatest unknown, however, is ASIC. While the government has endorsed the Combined Industry Forum, it has endorsed it as an advisory group, not a regulator in its own right. O’Dwyer has said “the government
will take the mortgage industry forum’s process into account when finalising its response to the review”.
The roundtable’s participants accept that this is the case. In July, FBAA director Peter White said the industry could “never truly self-regulate … the industry can have input and offer guidance on possible measures and outcomes, but the decision is made by the minister through Treasury, and ASIC then polices those outcomes”.
ASIC did not make a submission to the Treasury, nor has it commented publicly on the forum, although MPA has been informed that ASIC representatives have attended the forum’s meetings. However, Michael Saadat, senior executive leader at ASIC, gave a good indication of ASIC’s stance when he talked to MPA following the publication of the review.
“The industry can have input and offer guidance on possible measures and outcomes, but the decision is made by the minister” Peter White, FBAA
The review, Saadat said, “was more about us trying to get the industry to respond without being forced by legislation to have change imposed upon them. We think the industry has an opportunity to respond and make changes that will deliver improved consumer outcomes without necessarily needing the government to legislate for changes”.
Will tinkering with the calculation of upfront commissions be deemed by ASIC as improved consumer outcomes? When the forum delivers its first report to the Treasury in November, and then further reports next year, it will quickly become obvious whether the industry has successfully maintained the status quo, or made a terrible miscalculation.
If you’re interested in ASIC’s other proposals, regarding bonus commissions, soft dollar, disclosing ownership, public reporting and governance, please go to mpamagazine.com.au