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Stephen Sedgwick believes the remuneration-related risk that referrers pose to borrowers is “much lower” than the risk with brokers, with whom they share comparable upfront commissions.
Both the ABA-initiated Sedgwick review and the ASIC report into broker remuneration found that introducers and referrers receive almost as much upfront commission as mortgage brokers and aggregators.
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“There was no evidence available to the review that led us to conclude that poor outcomes were resulting from introducer and referrer activity. Given the limited role available to introducers and referrers, the remuneration-related risk would seem much lower than in the case of staff or mortgage brokers,” Mr Sedgwick said in his report.
However, he noted that due to the “limited work” undertaken by referrers compared to mortgage brokers, the upfront commission paid to them for a successful ‘sale’ appears to be “disproportionately high”.
Mr Sedgwick believes this is a matter for the commercial judgement of the relevant banks.
ASIC’s report proposed that the remuneration of referrers be reviewed by lenders to ensure it is not leading to poor outcomes. The regulator will follow up with lenders to ensure that they are properly managing risks with referrers.
“We also propose that lenders significantly increase their governance and oversight of the referrer channel as for brokers to ensure that misconduct is not occurring,” ASIC said.
Mr Sedgwick agreed with ASIC that banks should review their arrangements with introducers and referrers to ensure they remain appropriate.
“ASIC may wish to investigate the practices of these third parties and the justification for such payments in due course,” he said.
“One issue for consideration is whether such payments persist at these levels because banks are reluctant to take the competitive risk of being the first to move rates down to a more justifiable level.”
Last month, The Adviser ran a number of news stories on the referral model that revealed the sophisticated nature of the industry, which mirrors mortgage broking with the existence of aggregators providing a range of services to referrers such as real estate agents, property developers and accountants.
One of the stories received strong reactions from brokers. One broker described the mortgage referral industry as a “dirty truth” that is widespread, and questioned what action ASIC was taking.
Another broker alleged that some banks pay trail commissions to referrers.
Mortgage broker Ken Olds said he was “very pleased” that the ASIC review had made the referral model more public.
“It would have been unknown to the regulators when the original inquiry was commissioned,” Mr Olds said.
"I truly hope that ASIC bans these referral arrangements. Referrers should not be able to be paid for referring direct to a lender, which limits a consumer’s choice and, I suspect, has a poor level of disclosure.
“Consumers clearly have the right to go direct to a lender, where they themselves choose to be limited on choice. This right should not be allowed of others. Referrer arrangements do have a place with brokers, where the broker can still provide the full range of choice. Any other arrangements need to be banned.”
[Related: Highly paid referrers looking to eat brokers' lunch]
