The first round of hearings set the tone for a far-reaching inquiry that could send banks and mortgage businesses into damage control.
As soon as the proceedings kicked off, it became clear that this inquiry was on a whole different level to anything the financial services industry has seen before.
Royal commissioner Kenneth Hayne’s probe makes the Productivity Commission look like amateur hour. In fact, I doubt anyone will remember the Productivity Commission at all within a week or two — the scathing news headlines from the royal commission will simply smother it into obscurity.
NAB’s EGM of broker partnerships, Anthony Waldron, was first to appear before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Senior counsel assisting Rowena Orr QC wasted no time lifting the bonnet on NAB’s mortgage business, including a deep dive into its “introducer program”, a network of referrers that collectively sent that bank $28 billion worth of mortgages between 2013 and 2016.
Based on the calculations that the bank was paying commission of 60 basis points to a referrer for every referral that was eventually drawn down (or 40 basis points for existing customers that took out a new loan over the value of $50,000), the court suggested that the bank therefore paid more than $100 million in commissions to introducers during this period.
The commission also heard of alleged bribery at the major bank.
Ms Orr highlighted an email between NAB employees, and it revealed that a whistle-blower had alleged that NAB staff members were “charging NAB customers a fee for personal loans. These fees are allegedly made as cash payments under the table”.
It was revealed that a customer and a broker had highlighted the behaviour, which involved a branch manager and two customer advisers.
“This was not about the introducer program at all, was it? It was, in fact, an allegation of bribery,” Ms Orr said, to which Mr Waldron tentatively agreed: “Potentially, yes.”
That branch manager was subsequently dismissed.
The hearing later revealed that in a separate issue, but in a similar geographical area, NAB had already begun looking into another suspected case of misconduct.
“Our forensic services team are continually doing reviews looking for misconduct,” Mr Waldron said.
In this case, another whistle-blower was concerned with a “syndicate” comprising 11 people (six of which being branch managers) who were reportedly taking bribes.
The whistle-blower told NAB that these people were making up fake payslips, fake IDs and fake Medicare cards, and had reportedly “seen a little bit of evidence, and [had] also heard from others, in the local area market (one of them a branch manager at a different store, not involved), that they charged $2,800 bribery for each customer for home loans mainly, but also personal loans”.
The QC also went on to reveal that the customer adviser “went for a home loan and someone thinks he used a fake guarantee. They could not identify the person on the guarantee”.
The whistle-blower was reputedly recorded as saying that one customer recently said, at a particular breach, they told him he could borrow $800,000 but the valuation was only $450,000.
Ms Orr outlined that the whistle-blower alleged that “money exchanges hands in cash in envelopes — white envelopes, usually over the counter”.
Australia’s largest mortgage provider, CBA, got off relatively lightly compared to NAB. But mortgage brokers didn’t.
In fact, during Thursday’s hearing, where CBA EGM of home buying Daniel Huggins appeared as witness, the commission learnt of a “confidential” letter in which outgoing CBA boss Ian Narev outlined his concerns with the current mortgage broker remuneration model.
Mr Narev wrote to Stephen Sedgwick (of the infamous Sedgwick review) and basically told him that broker commissions were conflicted and suggested extending FOFA to include the mortgage industry.
The following day (Friday, 16 March), which saw Aussie Home Loans chief financial officer Giles Boddy in the witness box, Mr Narev’s letter was read out again. This time it was counsel assisting Eloise Dias asking the questions.
Mr Boddy struggled to agree with Mr Narev’s remarks, which flagged a higher portion of interest-only and higher LVR loans through the broker channel. He noted that Aussie’s arrears rate was “around the 1 per cent part”, similar to that of the banks.
The Aussie CFO was also pressed on whether he believes that a flat-fee model would remove conflicts.
“You need to be careful” moving to a flat-fee model, the CFO said.
The big question is what all this will ultimately mean for mortgage broker remuneration. While it’s too early to tell, there have been a few worrying signs.
During Friday’s hearing, commissioner Hayne and counsel assisting Eloise Dias seemed fairly confident that broker commissions are ultimately paid by the customer. And they didn’t look too pleased about it.
James Mitchell is managing editor, mortgages and wellness, at Momentum Media.
The fraud through mortgage brokers has been known to any one who was not living under a rock, ( sorry, not all, since everyman and his dog became a broker) fake payslips, not stating actual income or expenses, its about time some of these people get off the gravy train!!
WHat is the fixation with commissions? Banks get inflows from brokers and that means that banks dont have to pay salaries and bonuses or for space to other wise get the loans. Commissions and bonuses based on volume, are in nearly every product sale in the world. Incentives other than cash would also constitute a commission. Is that wrong? The customer is said to be paying the commission… yet the fee that a broker would charge is also paid by the customer… no different. A fee to the bank gets lost in revenue and is harder to link to a person(s) salary and bonus… yet the cost is there. If i sell a widget to a business and only receive commission, I only get paid when I am successful. As an employee, I get paid regardless of how hard I work. The employer decides if I am valuable. A commission shows that I am valuable – a sale and an income. To my mind, commissions are fine and to try to engineer this as bad is a misdirection of common sense. Now the corruption – well lets have that as the focus as that is really important and needs to be stamped out everywhere. I support mortgage brokers – they do help customers make loan decisions and commissions are not high in home lending.
Ivory towered bureaucrats and lawyers always leap to the conclusion that if a mortgage or insurance provider didn’t pay a commission the product would be cheaper. Wrong, wrong, wrong!!
In most cases, commissions are just an outsourced client servicing and implementation cost for a complex product. When these things aren’t outsourced, the costs have to be incurred internally instead. It doesn’t lower the price of the product. In many cases it actually increases product costs. Advisers and brokers are usually far more effective and efficient in providing these sorts of services. And the fact they can choose from multiple providers promotes competitiveness and further drives down costs.
Its pretty clear really. If I go to a mortgage broker to pay a one-off upfront fee they dont have incentive to write a loan as large as possible. If I had $1 every time I heard a broker say “borrow extra and put it in your offset account” so they can increase their commission, i’d probably be the US President. Same goes for insurance. If you get paid a commission there is a clear conflict especially not considering options that wont pay you a commission…
Nearly all service providers have financial incentives to do things that may not be in the client’s best interest. Surgeons have a financial incentive to operate on patients who may not need it. Accountants have a financial incentive to recommend SMSFs for clients who would be better off in a low cost public offer fund. Conflicts are unavoidable and have nothing to do with payment method. The important issue is how the conflict is managed. In the case of insurance advisers it is managed through a statutory best interests duty.
Mortgage brokers are not subject to this yet, which is why some consumer groups are lobbying for it. But fees are definitely not the answer. If consumers are forced to pay mortgage brokers an upfront fee, they will just go direct and get duped into a higher cost, lower featured, product by the banks. They will be worse off.
BTW many lenders are moving to paying commission on the net loan after offset balance. The loophole you mentioned has been spotted and closed. It is not a material issue in the overall scheme of things.
For 15 years, risk advisers have been hammered by ASIC on $$$ disclose of UF & trail comm on risk
Mortgage brokers were supposed to be doing the same.
NOT SO !!! Where the hell was ASIC ?
The evidence says ASIC were trying to do as little as possible to impact the banks, and only after a media splash.
Now ASIC are apparently planning on letting “SALARIED ” bank RISK advisers operate under a completely different commission disclosure regime