Lenders set to shake up $1.5t mortgage industry
Lenders set to act on ASIC's recommendations about mortgage brokers
by James Eyers
Major banks will shake up their relationships with mortgage brokers in anticipation that lucrative bonuses will be outlawed after sweeping recommendations for the $1.5 trillion mortgage sector, according to industry sources.
Key recommendations, which were exclusively revealed in The Australian Financial Review, are intended to axe commissions tied to sales targets and soft-dollar benefits, such as trips and invites to events, and to boost disclosure about the relationship between brokerages and banks and improve scrutiny of advice and payments.
Mortgage broker industry bosses, whose businesses account for more than half the mortgages recommended, broadly welcomed the proposals and said they would work with the government and industry to see them implemented.
John Flavell, chief executive of Mortgage Choice, a listed mortgage brokerage, said: "Anything that gives greater transparency is positive. The findings are sensible and consistent with our expectations."
But Mr Flavell said top performing brokers should be recognised and rewarded with special incentives and rewards "just like top performers in any other industry".
Aussie Home Loans, which is owned by Commonwealth Bank of Australia, the nation's largest lender accounting from one in four mortgages, said commissions "provide customers with a free service, while allowing our lenders to gain extensive distribution of their products". It also supports the recommendations.
The Australian Securities and Investments Commission warned the payment by banks of upfront and trail commissions to brokers, which is the standard model across the industry, "creates conflicts of interest" and "could encourage brokers to place consumers in larger loans, even when this may not be in the interests of the consumer". It called on banks to change the arrangements "so that brokers are not incentivised purely on the size of the loan".
It also called for the market to move away from paying "bonus commissions" to brokers and bonus payments to their own staff relating to meeting sales targets. These were described as "a form of remuneration structure that creates a higher risk that brokers will place consumers with lenders for the wrong reasons".
Soft dollar benefits, or non-cash rewards such as travel perks, "increase the risk of poor consumer outcomes," ASIC said, and should also be abandoned.
ASIC said these structures could lead to brokers having both a 'product strategy conflict', where they recommend loans that are larger than the consumer needs or can afford to maximise the commission, or a 'lender choice conflict', because of higher commissions for their advice.
The regulator also found the arrangements were anti-competitive, suggesting that even where smaller lenders, such as credit unions, won a place on a broker aggregator's panel, bonus commissions and soft dollar benefits "make it hard for smaller lenders to compete with larger lenders".
ASIC said the investigation into bank staff remuneration currently being conducted by former Australian Public Services commissioner Stephen Sedgwick "provides an opportunity for the banking industry to re-consider the standard commission model".
The ASIC report, released by Minister for Revenue and Financial Services Kelly O'Dwyer on Thursday afternoon, made 13 separate findings and six proposals for reform.
Meanwhile, blueprints for changing controversial segmentation strategies that reward brokers for high quality
and high loan volumes with sweeteners such as preferential treatment and faster turnaround times are being finalised in the wake of the exhaustive review.
The industry has until June 30 to provide submissions to Treasury on the report.