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A recently published parliamentary committee report suggests that Sedgwick’s recommendations to reform broker remuneration were not readily accepted by the big banks.
The third report from the House of Representatives Standing Committee on Economics concerning the review of the four major banks was released on Thursday (7 December).
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Within the 53-page document, under the header “Remuneration policies and incentives”, the committee notes that there is community concern that the banks have historically prioritised sales over customer service, and that this culture has been institutionalised through employee remuneration policies and incentives.
The report is based on responses provided by the major banks during parliamentary hearings in Canberra back in October. While the majors stated that they had changed their remuneration scorecards in response to the Sedgwick review, they told the committee that implementing broker remuneration reforms were not so straightforward.
“The banks also stated that the recommendation relating to mortgage broker remuneration presented the greatest challenge because it involved third parties,” the committee report said.
“However, they committed to work through the issue with industry.”
The report included a quotation from ANZ chief executive Shayne Elliott, who said of Sedgwick’s remuneration reforms: “The one that’s the most complicated is around third-party brokers, basically. The only reason for that is that it’s hard for us to do it unilaterally. But we’re working really hard with the industry, through the ABA, with our peers, and with the broking industry, to get that done.”
That hard work culminated this week in a landmark report by the Combined Industry Forum (CIF), made up of the ABA, the MFAA, FBAA, AFIA and COBA.
All four major banks participated in the CIF, which has now delivered its report — a response to ASIC’s remuneration report and the Sedgwick review — to the federal government.
In the response, the CIF agrees to six principles that aim to “ensure better consumer outcomes and improved standards of conduct and culture, while preserving competition in mortgage broking”.
The six proposals are:
1. The standard commission model will avoid financial incentives that encourage consumers to borrow more than they need or will use — for example, by basing commissions on facility draw-down net of offset.
2. Volume-based and campaign-based commissions paid by lenders and aggregators are recognised as raising potential conflicts of interest and poor customer outcomes and are expected to cease.
3. Non-monetary benefits will only be given based on a balanced scorecard and good customer outcomes, and benefits given by lenders will be capped.
4. Ownership models and commercial relationships will be made clear on all marketing materials, including websites, where ownership is greater than 20 per cent so consumers have the right information to make informed choices.
5. ASIC and consumers will be given clearer information on where loans are written, commissions paid and interest rates to increase transparency and accountability in the industry.
6. The industry will introduce an improved Governance Framework that monitors for, and identifies risks, and requires the industry to take action and continuously improve where issues are identified.
The reforms also, for the first time, set a standard definition for “good customer outcomes”, which looks at the size and structure of the loan, affordability, responsible lending requirements and individual customer needs.
The definition reads: “The customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”
