Yesterday, the government released the ASIC ‘Review of Mortgage Broker Remuneration’ for public consultation. It comes after the government requested ASIC to undertake an industry-wide review in November 2015 as part of its response to the Financial System Inquiry.
In the report, ASIC said the standard model of upfront and trail commissions creates conflicts of interest.
“Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment,” the regulator said.
“This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan).
“Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer.”
ASIC said that in addition to receiving upfront and trail commissions for each individual loan they arrange, aggregators receive bonus commissions from lenders that can be passed on to brokers and affect their behaviour.
Brokers also receive “soft dollar” benefits from lenders and aggregators, including travel and hospitality-related benefits.
“These additional commissions paid by lenders or aggregators on top of the usual upfront and trail commissions can create a stronger incentive (and conflict of interest) for a broker to recommend a loan from a lender that is offering extra commission,” the regulator said.
“As with bonus commissions, we consider that the provision of soft dollar benefits is likely to be a significant motivator for brokers to send loans to a lender to qualify for those benefits even where the choice of lender may not be in the consumer’s interest (i.e. lender choice conflict).”
Further, ASIC said it found that both lenders and brokers do not make sufficient inquiries into consumers’ expenses.
The review outlines a number of proposals for the industry aimed at improving consumer outcomes, including:
• improving the standard commission model for mortgage brokers;
• moving away from bonus commissions and soft-dollar benefits;
• increasing the disclosure of mortgage broker ownership structures; and
• improving the oversight of mortgage brokers by lenders and aggregators.
In response to the report, Minister for Revenue and Financial Services Kelly O’Dwyer said, “It is important that industry have the opportunity to fully consider ASIC’s report and provide feedback to Treasury as part of a three-month consultation process.”
CBA also said, “We recognise the importance of ensuring the right outcomes for home buyers and mortgage brokers provide a value service to customers.”
“We are supportive of recommendations that promote greater transparency for customers and we will review measures that could deliver a higher level of disclosure,” the bank said.
“We work closely with our mortgage brokers and trust they will always help customers find the product to best meet their needs.”
The deadline to make a submission on the review is 30 June 2017.
