Association heads slam Productivity Commission findings

• 52 public submissions (available on the inquiry website);
• findings from three roundtable hearings and discussions with representatives from the financial regulators, the regional banks, non-banks and consumer groups; as well as
• discussions with about 70 businesses, business groups, government agencies, academics and individuals — including the ABA, AFG, CAFBA, MFAA, UBS’ Jonathan Mott and Rachel Bentvelzen, Liberty and Pepper, among others. 

The PC said that it made detailed data and information requests to a number of entities as input to the inquiry, adding that a “range of information was also provided to the commission in confidence, on the understanding that the commission would not publicly release the information in a way that could be attributed to the providing entity”.

The report makes 25 draft recommendations, with several focusing on changing the way brokers are remunerated or deliver advice.

It therefore made several suggestions on changing how brokers operate, including draft recommendations on imposing a “clear legal duty on mortgage aggregators owned by lenders [and the brokers operating under them] to act in the consumer’s best interests”, and it suggested that there is “likely to be merit in removing trail commissions and commission clawbacks from mortgage broker remuneration structures”.

“This reads like amateur hour”

Both the Mortgage & Finance Association of Australia (MFAA) and Finance Brokers Association of Australia (FBAA) have lampooned the draft report for its conclusions about broking. 

The executive director of FBAA, Peter White, said: “To me, this reads like amateur hour, with no knowledge whatsoever on the broking sector… it’s nonsense. 

“They are making swings at the broker space… yet, if it wasn’t for brokers in Australia, you wouldn’t have the pricing competitiveness and product enhancement that we have today. Things like redraws, offset accounts, lines of credit against a residential house — these things were all brought in by the competition and the development of products in the broking sector.”  

Mr White added: “If you look at the broker space, it provides an enormous value.”

Touching on the PC’s suggestion that trail creates “perverse incentives for mortgage brokers”, Mr White said: “Brokers do a job, they are entitled to get paid for it. Trail is paid because they do work post settlement to maintain the relationship and the needs of the client.  

“Trail commission was brought in for two reasons: to stop churning of portfolios; and [because] lenders want brokers to look after the client on their behalf so that they stay [with them] longer, [then brokers] are being paid to do something. 

“Losing trail would be the dumbest thing on the planet to do and it would be a real risk to every lender in this country.”

Mr White went on to say that the PC’s suggestion of “allowing financial advisers to provide advice on some credit products would also introduce contestability in the provision of advice” would mean that “mortgage brokers would no longer be the primary providers of information on mortgage products”. He said that “the reality is that financial planners are already in this space”.

He said: “Financial planners are all in the marketplace already. There have been many issues reported in that space already though, so if you want to line up the two styles of professions [financial planners and brokers], have a look at the issues in the financial planning space over the last 15 years and compare them to the broking space and the lending area. I know where the majority of issues sit.

“If that is what the [Productivity Commission] is suggesting… and I don’t know if they are or not, but if that is what the PC is suggesting, then that is just ludicrous.”

PC has “failed to understand” why consumers use brokers

Likewise, the MFAA said that it was “disappointed by the limited view of the mortgage broking industry” presented in the report, arguing that its authors have “failed to understand the reasons why consumers engage brokers to act on their behalf, and ignore[d] the value that mortgage brokers have brought to the Australian economy over the past 20 years”.

The CEO of the MFAA, Mike Felton, said that the report also failed to acknowledge the reforms already put forward by the Combined Industry Forum (CIF) — some of which are already being implemented — that were designed to further strengthen customer outcomes across the industry, and which include a higher obligation to customers than is currently required by law.

Mr Felton said: “The fact is that 55.7 percent of mortgages are now originated by brokers, and the broker value proposition for consumers is based on more than just price.

“Mortgage brokers offer customers the choice of a wide range of lenders and products. They work through ever-increasing complexity to place their customer at the centre of the process and match products to their specific needs. Brokers offer convenience for customers by removing the administrative burden of obtaining a mortgage, while providing personalised advice and service over the life of the loan. 

“They also help their customers find a product with a competitive rate.” 

Mr Felton noted that the broker channel had fundamentally altered the market and has continued to drive competition and choice for consumers. 

The MFAA was also concerned that the Productivity Commission’s report has called brokers’ motives into question, at a time when the industry has already recently been the subject of such intense scrutiny by financial regulators.

“We have been through ASIC’s broker remuneration review and the ABA Sedgwick review, neither of which found evidence of systemic harm to consumers,” Mr Felton said.

“At the same time, the industry has formed the CIF, which has already reported to ASIC and government on a strong package of reforms that addresses the issues raised by ASIC around product and lender conflict.”

Mr Felton added that he was “extremely proud of the contribution brokers make to competition for consumers and to the Australian economy overall”.