Associations denounce consumer groups’ ASIC response

CHOICE, which has strongly criticised the broker channel in the past, said it was “simply not good enough” that ASIC “has left it up to the industry to find a solution”.

The outspoken group suggested that the way mortgage brokers are currently paid “means it’s very unlikely that a customer is going to get a loan that’s best for them” and that the industry therefore needed a “major change”.

CHOICE’s head of campaigns and policy, Erin Turner said: “We’ve called for urgent action on trail commissions, monthly payments from a lender to an aggregator which is passed on to a broker over the life of a loan.

“A lender pays out an average of $750 per year for the life of a home loan through trail commissions. Trail payments are money for jam. The broker makes money for doing nothing, discouraging them from reviewing the quality of a loan long term.”

Both associations for the mortgage broking industry have criticised the “ill-informed comments” and slammed the recommendations as “detrimental” to consumer interests.

Proposals would lead to interest rate increases

The executive director of the Finance Brokers Association of Australia (FBAA), Peter White, said the groups had “no regard for the competitive position and incredible value proposition that brokers bring to home loan borrowers”.

He went on to say it was “very concerning” when “misinformation is disseminated by those claiming to be consumer advocates, but who don't tell the truth”.

Mr White suggested that, without the competition of brokers and non-banks, interest rates would still be around the 7.5 per cent mark (rather than 4 per cent).

He added that the suggestion of a flat fee would actually lead to a rise in interest rates.

“The average loan amount nationally is around $450,000 and the average commission is 0.60 per cent, meaning a flat fee, commercially, would be around the $2,700 mark,” he said.

“In regional markets, where loan sizes are smaller, a loan of $200,000 would (in the current structures) pay around $1,200 and not $2,700 in a flat-fee model, and lenders would never wear such a loss.”

Mr White said the groups also claim that mortgage brokers are giving advice, yet that’s not the case.

“Under the regulations that govern mortgage brokers, they give credit assistance and are doing work on behalf of the lender, which is why the lender pays them a commission and it has no bearing on the interest rate the borrower pays.

“If you don’t use a broker you go to a bank which still has the administration costs for the loan, so it’s cheaper for the bank to originate a loan through a broker than at a branch.”

He said the suggestion to abolish trail commissions is “an ignorant position to take”.

Speaking of the consumer groups in question, he said: “If they knew their subject matter, they would know that trail commission is paid to brokers to offset costs of providing ongoing customer service and to manage the borrower’s ongoing and variable lending needs as required under the national consumer credit protection regulations.

“There is absolutely no evidence to suggest trail incomes harm competition.”

Changes would ‘significantly harm the interests of consumers’

The Mortgage & Finance Association of Australia (MFAA) also released a statement, saying it was “disappointed” by the consumer groups’ submissions and comments, adding that they would “significantly harm the interests of consumers they claim to represent”. 

Touching on the consumer groups’ proposals, Mike Felton, CEO of the MFAA, said: “A fee-for-service model may suit lenders, but it would drive the majority of brokers out of the industry. This removal of access to brokers for Australians would severely reduce competition in the industry, which is something we are trying to avoid for consumers. 

“A single, lender-funded, fee-for-service would lead to a standardisation of all fees, which we believe ASIC itself does not support and we believe would also be considered anti-competitive by the ACCC,” Mr Felton said. 

He continued: “I do not see how removing brokers from the industry, and consolidating power back in the hands of banks, serves the needs of consumers.” 

Mr Felton highlighted a 2015 Ernst & Young study that found that 92 percent of consumers reported they were ‘satisfied’ or ‘very satisfied’ with their broker’s performance, and highlighted that consumers have increasingly turned to brokers to arrange their home loans – with more than 53 per cent of all mortgages written by the third-party channel. 

He concluded: “This is also about access to finance for Australians. If you live in a regional or rural area, you may not have access to a bank branch – or you may have access to one bank branch. Brokers provide regional Australians the same access to finance as people who live in inner Sydney or Melbourne and it is critical that we should avoid doing anything to negatively impact that.” 

Mr Felton said that the proposals also did not reflect the concerns raised by ASIC. 

He commented: “ASIC understands that brokers drive competition and provide a critical service to consumers that combines choice, expertise and convenience, to help them make informed choices and get the most appropriate deal… 

“When you are obtaining a mortgage, there is a lot more at stake than just the interest rate. Brokers assess the needs of their customers in detail, both now and into the future and recommend products and lenders that suit these needs.” 

Both associations said that they have been actively working with ASIC, Treasury and a number of other key stakeholders on different ways to improve the commission structure to enhance consumer outcomes.

[Related: ASIC suppositions ‘dangerous’ and ‘problematic’, says aggregator]