ASIC: change standard commissions and move away from bonuses

The report, which was released yesterday for consultation, was initiated following a request by the Commonwealth government in November 2015 for ASIC to review the mortgage broking market and determine the effect that current remuneration structures have on the quality of consumer outcomes.

According to ASIC, the review involved - amongst others- 17 lenders, 15 aggregators, 55 brokerages, four comparison websites and three referrer aggregators, as well as meetings with stakeholders such as the Finance Brokers Association of Australia (FBAA), the Mortgage & Finance Association of Australia (MFAA), the Customer Owned Banking Association (COBA), the Australian Bankers Association (ABA) and the Australian Finance Conference (AFC).

In all, the reviewers reportedly analysed 1.4 million lines of home loan data and commissions information on over $550 billion of new home loans.

After reviewing the data and considering stakeholder information, ASIC proposed to government six recommendations to “improve consumer and market outcomes”.

The proposals, subject to consultation with stakeholders, are:

1. Changing the standard commission model

ASIC proposes that lenders change their standard commission arrangements so that brokers are not incentivised “purely on the size of the loan”. Instead, ASIC suggests that lenders could “reflect the loan-to-value ratio (LVR) of the loan (and other considerations such as compliance metrics) in how they calculate upfront and trail commissions".

It also suggests that that lenders “do not structure their incentives in a way that encourages the creation of larger loans that initially have large offset balance”.

2. Moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes

ASIC noted that bonus commissions and bonus payments may “not necessarily cause poor consumer outcomes”, but are a form of remuneration structure that “creates a higher risk that brokers will place consumers with lenders for the wrong reasons”.

It therefore proposed that the industry moves away from bonus commissions and bonus payments.

3. Moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition

Noting that soft dollar benefits have been prohibited in other parts of the financial services industry, ASIC suggested that the home loan industry could also “move away from giving soft dollar benefits”.

The report reads: “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). This may include placing consumers in larger loans (i.e. product strategy conflict) and lead to poor consumer outcomes”.

4. Clearer disclosure of ownership structures within the home loan market to improve competition

To reduce the impact of ownership structures (such as ownership by lenders of aggregators businesses) on competition in the home loan market, ASIC is proposing that participants in the industry “more clearly disclose their ownership structures”.

The report suggested that “clearer disclosure of ownership structures should extend beyond mortgage brokers and apply to all players in the home loan distribution chain, including lenders, aggregators, and brokers”. As such, it said: “clearer disclosure should occur in marketing material and at all distribution points (e.g. websites and physical premises)”.

5. Establishing a new public reporting regime of consumer outcomes and competition in the home loan market

To improve transparency in the mortgage broking market, ASIC is proposing that there be public reporting on:

• the actual value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied;
• the average pricing of home loans that brokers obtain on behalf of consumers;
• the average pricing of home loans provided by lenders according to each distribution channel; and
• the distribution of loans by brokers between lenders to give consumers a better indication of the range of loans that brokers within the network offer.

6. Improving the oversight of brokers by lenders and aggregators

ASIC’s last proposal reads: “To reduce the risk that remuneration structures may result in poor consumer outcomes and inhibit competition, there is a need for all industry participants to place greater importance on fostering a consumer-centric culture and take more care in the design and monitoring of remuneration structures.”

For example, it said that it “expect[s] lenders, aggregators and broker businesses to embed the principle of obtaining good consumer outcomes as a guiding factor in the design of their remuneration arrangements (both in the broker channel and in relation to their own staff)” and for “aggregators to recognise that, as the party that passes commissions from lenders to brokers, they are well placed to ensure that such remuneration is consistent with the attainment of good consumer outcomes”.

Better oversight of brokers and broker businesses was also proposed, such as “actively monitor[ing] the consumer outcomes being obtained by brokers and broker businesses”, providing “consistent reporting to aggregators”, and using “a consistent process to identify each broker and broker business”.

It also proposed that aggregators require lenders to provide consistent reporting on the outcomes obtained by individual brokers and broker businesses (including those relating to loan pricing, features, clawbacks, and refinancing and default rates) and “actively monitor the consumer outcomes being obtained at a broker and broker business level”.

Value of brokers recognised

Despite the recommendations, the report is favourable to brokers, with ASIC noting that “brokers play a very important role in the home loan market”.

It continued: “They are responsible for arranging around half of all home loans in Australia. Consumers are increasingly turning to brokers to get help in obtaining a home loan — in 2012 brokers arranged 47.7 per cent of home loans for the lenders in our review. In 2015, this increased to 54.3 per cent…

“Brokers arranged almost 520,000 new home loans from the lenders in our review in 2015 (compared to 340,000 in 2012)… [and] can play an important role in promoting good consumer outcomes and strong competition in the home loan market.”

ASIC noted that in a “well-performing market” brokers can match the needs to the consumer with the right home loan and “improve consumer understanding of home loans and financial literacy”, as well as “play a valuable role in providing a distribution channel for lenders — especially smaller lenders—without their own distribution network (e.g. branches)” and “exert downward pressure on home loan pricing, by forcing lenders to compete more strongly with each other for business”.

However, it warned: “Remuneration and ownership structures can, however, inhibit the consumer and competition benefits that can be achieved by brokers. In setting out our findings, we have made a number of proposals to improve consumer outcomes and competition...

“These proposals should strengthen the positive contribution that brokers provide in this sector.”

New reviews on the horizon

ASIC said that these changes “should be implemented before a further review of the market is conducted in three to four years to determine whether additional changes are required”.

Notably, the commission also proposed to “conduct a targeted review of the suitability of advice provided by brokers (including through a shadow shopping exercise)” later this year.

The Minister for Revenue and Financial Services Kelly O’Dwyer commented: “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."

Interested parties are encouraged to make a submission on the review by 30 June 2017.

The full report has been released for public consultation.

Need to know more? Find out exactly what the remuneration review means for you and your business.

NAB, in association with The Adviser, will hold a series of roadshows across the country to inform brokers on the recently released ASIC Review of Mortgage Broker Remuneration, delving into the 243-page report and explaining everything brokers need to know.

Knowledge is Everything - Series 2: ASIC Review of Mortgage Broker Remuneration will be held on the following dates:

Melbourne - 28 March
Brisbane - 30 March
Perth – 4 April
Adelaide – 5 April
Sydney – 6 April

Don’t miss this essential event! Save the date now. More information to be released next week.

[Related: Remuneration report released]