Regulation specialist suggests remuneration is 'inherently conflicted'

However, Ms Kelly acknowledged that while she was not “advocating commissions”, she understood that resolving this conflict, without severely damaging the broker channel, would be difficult.

She said: “There have been concerns raised that mortgage brokers won’t be able to charge for the advice that they give. That may be a valid concern, and if it is a valid concern, the question that follows on from this is: how much do consumers actually value the service that mortgage brokers are providing them? So, I think it’s a very tricky issue. But I certainly do think that payments from product providers are inherently conflicted and it’s very hard to resolve that.

"[But] I struggle to see how we could find another solution for mortgage broking ultimately — because you just can’t resolve that conflict.”

Commission caps on the horizon?

During her talk on broker remuneration, the solicitor director suggested that ASIC’s remuneration review would not result in large-scale changes, just smaller ones.

She put forward that capping commissions would be one of the simplest and “non-controversial” ways of meeting ASIC’s proposal of moving broker commissions away from loan size.

Ms Kelly said: “I think that we may see some changes to standard commission, but I’m not necessarily convinced that we will see, in the initial stages, any change to building any additional metrics, just because I think that’s a little challenging in the short term.

“We might see commission caps suggested, even though that is not something ASIC has necessarily [said it would be doing], just because a commission cap is a relatively easy and non-controversial way to address a concern around remuneration.”

According to Ms Kelly, one of the challenges for building a metric for standard commissions that acknowledge things like loan-to-value ratio (LVR) is “coming up with a comprehensive list of factors that should be taken into account”, as it requires cross-industry consensus and debate.

“There could be far more different opinions and I think that’s why, if we see a shift to that kind of model, it’s more likely to take a longer time for it to be developed or otherwise be something that will be pushed through industry by regulation.”

However, Ms Kelly also suggested that there were inherent risks with the industry self-regulating, noting that the mortgage industry forum is currently meeting to propose to the government suggested policies on broker remuneration.

“The mortgage broking industry is engaging with a self-regulation process where they are hoping to come up with some way to move forward on remuneration arrangement that would be acceptable, and hopefully might avoid the need for formal regulation,” she said.

“The risk, of course, is that where industry tries to move self-regulation to avoid formal regulation, there is a natural tension between wanting to maximise your own outcomes but produce an outcome that would satisfy the regulator. And that in itself is almost a conflict in the same way that the remuneration is.”

A potential future ban on trail

Touching on trail commissions, the solicitor director admitted that any changes on that front would be “tricky” as they can motivate two different kinds of behaviour.

She explained: “[T]hey might motivate brokers to not recommend people to switch so they can keep that trail commission, but at the same time, it can actually encourage them to recommend more suitable products so that the customer will stay at that product and that will continue in the trail commission...

“So, I don’t necessarily think we’ll see any sort of suggested cut in trail commission at this point in time — whether that remains the case in future, I’m not sure. There could be a possible future ban on trail commission, but I think that one is still a bit up in the air and will take a few more years to see how the market and the regulatory environment evolves before we can comment further on that.”

When asked a question from the floor regarding trails and consumer outcomes, Ms Kelly elaborated that while she was “not necessarily saying we should keep trail commissions”, if she were speaking from a consumer-outcome perspective, she would “certainly be inclined to say that trail commissions don’t benefit consumers”.

Good consumer outcomes ‘being made up as we go’

However, when asked by The Adviser what the legal definition of a “good consumer outcome” was in financial legislation, Ms Kelly conceded: “I don’t think there is one right now.”

Adding that there are some “clues” as to what that could be (for example, ASIC’s report on life insurance being sold through car dealers [report 471] refers to value for money, or ensuring that those in the space are operating under an “efficient, honest and fair” ethos), “there is no definition of good consumer outcome because this is not something that has legislative mandate right now”.

Ms Kelly told The Adviser: “It’s just not in the legislation. So, it’s something that is being made up as we go — and I think that makes it particularly tricky. And that’s one of the reasons why I think — if we end up in one of those situations where we do have consumer outcome mandated — it's either going to come from a lot of ASIC guidance (which they would probably develop using the efficient, honest and fair power) or otherwise it would be mandated through government through legislative changes.

“But otherwise there is no guidance, which is why you can’t answer that question — it’s a new concept.”

[Related: Opinion: Commissions are great for consumers]