In Focus: Reviewing the reviews — FBAA on the commission inquiries

• What he believes brokers should be doing in this time of scrutiny
• How FBAA is working with the government
• What the Combined Industry Forum is up to

Articles of interest:

Association slams royal commission reporting
FBAA determined to carry torch for broking industry
‘Clawbacks need to go’: FBAA tells PC
Financial planners not needed in credit space: CBA

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FULL TRANSCRIPT:

Announcer:    Welcome to the Advisors In Focus Podcast. With your host Annie Kane.

Annie Kane:  Hello everyone and welcome to a special episode of In Focus Podcast. This week we have a special guest for you in executive director of the FBAA, Peter White. How're you doing Peter?

Peter White:  Good, Annie. Thanks for having us along.

Annie Kane:  Thanks for coming in. And always, I have my cohost alongside me, James Mitchell, Managing Editor Mortgages. How are you James?

James Mitchell:         Very good, thanks, Annie. Very good to be here.

Annie Kane:  Good. Well, here we're all going to talk about what the FBAA has been doing in terms of the whole situation at the moment in broking has been-

James Mitchell:         The situation.

Annie Kane:  This situation at the moment has been causing a lot of anxiety I think for some of our readers and I know that we've had the submissions and the Productivity Commission's report coming out now with the people's reaction to them. We've had the hearings from the Royal Commission. We've had the hearings from the Productivity Commission and there seems to be a lot of focus on mortgage broking, so as the head of the FBAA on the Mortgage Broking Association, it'd be good just to find out a little bit more about what you've been seeing happening in industry and what you've been doing behind the scenes, if you can tell us that.

Peter White:  Sure, I'll give you as much as I can. Obviously some things we can't openly talk about at this point in time, but they'll probably come to light in the future. It's certainly interesting times in which we live; there does seem to be a lot of jumping around on various subjects and the same old themes keep rolling around, so whether you're looking at the Royal Commission or the Productivity Commission's draft report or even ASIC Remuneration Review there seems to keep circling back on commissions and trails and so on. You sort of get to the point, say, "Oh, geez, I don't know how many times I gotta say the same thing, is it a hundred times or five hundred times..." we keep circling back. There's lots of things happening; right from the very beginning with the Productivity Commission, we're working fairly close with them, we've just given them some more information in the last week. As a fact, they've just responded to me on that. There's a bit more that we're gonna give them that we're writing at the moment.  Hopefully we'll have that in by midweek.

            With the Royal Commission, right from the beginning we're working quite close with what you call the AGS, which is the Australian Government Solicitor, so that's the lawyers working behind the scenes at the QC and the panelists and so on. We've been working on various matters there, I can't really go into details on that. They keep coming back to us for various pieces of information and other areas of concerns they I wanted to understand greater, I guess.

            One of the values we bring to the table is the amount of time we've been in the industry so we've seen and been through most things and some things seem quite evident whereas others are not, they're a little bit more closed so we're gonna have to shed a bit of light on those and even the simple things like the Productivity Commissioner I sat in front two and a half, three weeks ago now. They were saying, "Well, Mr. White, you're the first person that can give us that bit of data, how come?" Well, I don't believe in not being transparent - I think one of the big problems in this process, with not all but some of the banks and obviously they've been under heavy scrutiny, is that transparency piece.

            Trust is not something that's just given away, you've got to earn the right to it and that comes through being transparent, being truthful, and that will get you the trust. Sometimes I wonder if they cut off their noses to spite the face rather than just coming clean, whether it's good, bad, or different ... get it out, deal with it, then we can all move on.

James Mitchell:         I think with ... you mentioned that transparency piece, I know something that the Productivity Commission brought up was that banking data in particular, in terms of volumes and stuff like that, they go through third party and commissions that are paid, is kept in a black box, I think they said, it wasn't freely available. When you look at the ASIC Remuneration Review, that was a real deep dive into the industry, they collected a huge amount of data points. To me, as someone interested in looking at what's going on and reporting on the industry and on the scrutiny that's going on at the moment, I kind of see the ASIC method as a pretty decent method in terms of getting that data. But I can't see where the Productivity Commission did the same level of due diligence.

Peter White:  Yeah, it's interesting, you look at some of those data points through the Productivity Commissioner and you say, "What, did you just do a Google search and piece it all together, cut and paste?" 'Cause it looks a bit that way. Why?

James Mitchell:         There was some interesting things in there; they used UBS reports

            We'll get onto that in a minute.

Peter White:  I think they're getting data from everywhere.

James Mitchell:         They're getting data from everywhere, exactly, so they're collecting it where they can.

Peter White:  The interesting comment from the Productivity Commissioner when I was sitting in front of him, he turned and said to me, "We're talking about trails." And he said, "Mr. White, it's not the fact that you're getting paid a trail or what that quantum is, what are you doing for it is what I'm interested in." And it was an interesting position to take, 'cause most people attack, "Oh you’re getting money, you're not doing anything for it," that it's money that should either go back to the borrower or whatever the case may be, they're all worried about the quantum so much.  He very openly turned around and said, "Well, what do you do to deserve it," basically. That was a lot easier to answer in certain respects, but both of them are easy to answer I guess. But just take the position that ground.

            But the interesting thing though, is when you look at, say the ASIC rem paper, for example, it was very well researched. The biggest problem I had with it, I've been with ASIC on this, so I'm not telling tattles over school, is it didn't go far enough. It dealt with, let's call it 85% of the discussion, and left the 15%. So the debate about brokers ride higher loan size with higher LVRs. The LVR was about 5% difference and never cracked 30%, so with 70% proprietary channels, 75% through brokers. The monetary difference, depending on which data set you wanna look at with ASIC, was between $22,000 to $32,000, $33,000 in loan sizes.

            It wasn't a hundred grand, or two hundred grand, it's this little piddly amount, basically. And the reality is, I've actually spoken about this 'round the country multiple times now, and not one broker has rebutted against me, no one's gonna risk their businesses and their families and their livelihoods over what is a couple hundred bucks worth of commission in the first year, twelve months. It just doesn't make sense. And still today, in the Royal Commission, the Productivity, it keeps coming up: brokers ride higher loan sizes 'cause they're doing it ... 'cause they're all driven by commission. Yeah, no.

            Rather than part of a position you pack, we're putting back in the moment deals even further with this again. It's one of those repetitive subjects you gotta keep coming back to, because it's not a huge difference. No one asked the borrower, and this is my big sticking point, no one went to the borrower in the ASIC rem paper, and still today, as far as I'm aware, and said, "Was this a good loan for you? Was this a good outcome for you or not? Regardless, you got an extra twenty or thirty grand, was it a good outcome?" No one's asked the borrower ... so who are we to make a determination on a part of incomplete information, on behalf of somebody else? Doesn't make sense.

Annie Kane:  That is the crux of things as well, isn't it? It's this focus, as ASIC keeps on referring to it, on good consumer outcomes or great consumer outcomes. So I think yeah, it's definitely right that if you're gonna have a good consumer outcome ,in itself which is subjective, surely you need to ask the consumers.

Peter White:  Yeah, you'd sort of think it's a common sense position-

Annie Kane:  But I just ... the idea of the shadow shopping exercise now, so maybe that will have some answers in it.

Peter White:  There's probably good reason for some of that as well, that's what we're talking about. The reality is that when the paper was done ... refers back to the paper, not to the shadow shopping, refer back to the paper that was produced and put out in the beginning of last year, early last year. They all turned 'round and say, "Brokers write higher loan sizes, therefore they're chasing more commissions." No one actually puts the figure to it, and they should do, you need to go back to the mask. 'Cause that's an easy reach of, geez, a pool, or a small renovation, maybe even a car if somebody wants to go that way. It's not a lot of money. Those discussions aren't being had. I think it's important to understand that, and yeah I think the shadow shopping will pull that out a bit, although that may be a little bit more on the application process rather than the post-settlement process.

            The other question that was never asked is, they didn't ask the bank managers, say, "In that first six to twelve months after the settlement, did they come back and get a top-up on a credit card, did they get an add-on to their mortgage facility, did they get an unsecured personal loan?" To do those are the bits and pieces that the broker did in a more professional manner at day one, than rather people coming back having to piecemeal things which could wind up a lot more expensive.

            So this thing didn't quite ... the ASIC rem paper didn't quite complete the entire journey that it should have been on, or was on, and therefore the assumptions that are made today are based on incomplete data. And that to me is really dangerous, because we're making assumptions without knowing fact.

Annie Kane:  I think that's one of the things that the Connective response to the Productivity Commission report was saying, we've just been reading it today, which is why it's fresh in my mind, they were suggesting that some of the assumptions made are purely assumptions. They were sort of saying ... they called out one of the findings, I think it was worded in a way that suggested that the Commission thought that brokers were paid too much, and Connective was saying, "Too much in comparison to what? Who you asking?"

Peter White:  We've put out that comparison, you guys know we did the Global Research Paper. Well that's been given to the Royal Commission and the Productivity Commissioner; and in fact, part of recent conversations, just clarifying a bit more around that. And on a global scale we're not, and within the Productivity Commission, the hearing that I was at, he was talking about financial planning. So I've been in private banking, I've got some pretty good contacts in there, so I rang an old mate of mine and he said, "So what's the go with the commissions?" He said, "No, no, no, no, financial planner's up to a million dollars of funds and a manager charge up to 1%." And they get about a 0.2%, what we would call trail, but that's their annual review fee, actually charge more than what brokers do.

            And because we can't forget real estate agents ... we're almost in the same box, aren't we. They're dealing with the sale of the asset, we're financing the asset as such, and they're charging one and a half, two percent? Broker wouldn't even make anywhere near that with trail combined.

            But then we still forget that piece where trail income, where the broker's actually doing a whole lot of work for that. They're looking after client inquiries as they come up, every year they're having a look at the loan and making sure that their circumstances haven't changed, and if they have then gotta look at restructuring that. And this is where the PC made some very good comments on clawbacks. So is clawback potentially an inhibitor to do the right thing by the client because if you refinance that loan early you're going to get all this money clawed back from you. And yes, when they restructure there's another front, another trail, but it's that risk of the barrier to do the right thing by the client which should be removed.

Annie Kane:  And I think it's really interesting what you're saying, and what the Productivity Commissioner's been saying about trail in terms of this is what a broker does for it. It's not just that it's a passive income that sits there and you collect it, and brokers have to put a lot of work into managing their clients, which they do, obviously, and we know from people's ... even just the way CRM systems are built, they're constantly being reminded to get in contact with your client.

            I think one of the things that we'll probably see coming out of this, and this is just me riffing off what I've been hearing, is maybe a suggestion or a draft recommendation from the Productivity Commission that lenders put into place a more formal agreement as to what trail is for, and that would surely get rid of this questioning of what it's there for and what it's meant to do. If we have a formal agreement of this is what this commission is here for, then surely that benefits everyone, makes it much more transparent and it makes it much more clear as to what a broker's role should be, what a lender's paying you for, and what the regulators can look into it as.

Peter White:  I agree, and it also makes it a much cleaner transparency piece and if somebody isn't doing what they're meant to be doing, it's far more measurable so you can take greater action against that. I actually think that'd be a great outcome for that sort of thing to happen or that clarity to be put in place.

            Some of the interesting things you see coming out of the Royal Commission is talking about giving trail commissions back to the borrower-

Annie Kane:  Ah, that was the Productivity Commission.

Peter White:  Productivity Commission, sorry, yeah. I don't quite know how that would play out.

James Mitchell:         A refund home loan kind of deal.

Peter White:  Yeah, they fail. They didn't play out so well. But what do you do, does the broker get the trail then give it to the client? That ain't gonna work out so well. Do they just not pay it to the broker? Well, the banks aren't gonna reduce their interest rates, so that just means the banks make more profit, and the clients don't get service 'cause the broker's not getting paid to service the client, so it's a real bad outcome for the borrower. The other bad outcome would then start to, unfortunately for those that would consider, it's probably encourage churn. Now in America where they don't pay trail, six months out, twelve months out, they're churning all the time and they're making huge upfronts with no clawbacks. So you take clawbacks ... depending on you do clawbacks but with no trail in there, to there to be doing the right thing for the client.

            At the end of the day, the bank has the risk when they pay trail because the right outcome may be to take it from bank A to give to bank B. That might be the right thing for the client. So, the bank paying, it goes, "Well, bugger I missed out on that one," but then they'd get it around on the merry-go-round from somewhere else. It all plays out.

James Mitchell:         One thing I wanted to ask your opinion with the Royal Commission was, in the first week of hearings it was all consumer lending, home loan focused, we had a lot of stuff around brokers but introducers as well and Anthony Waldron from NAB was up there, and they were asking him about ... they introduced a programme but then there were a few questions about broking as well, and what I noticed in the mainstream papers, the Herald, the AFR, that sort of stuff, as you got some op-ed pieces and just general news being reported, and I think this happened on the ABC as well, is that people became confused about the difference between a broker and an introducer. And I think that is a potentially dangerous confusion to go out in the mainstream media, when there's this type of grilling happening with the Royal Commission.

Peter White:  Yeah, it's difficult. And I think it's more of a media confusion rather that the commissions base. But look it is problematic, and all of us in the industry are trying to grapple with it, I know the regulators have been looking at it for a year and a half, maybe a bit shy of that-

James Mitchell:         The introducer stuff.

Peter White:  Yeah, the introducer model, and saying, "Yeah, if you're an introducer and you're basically getting 60 basis points or 50 basis points to tick and flick, so then give me a name and number and away you go." Here are the brokers doing all this work for basically the same money, just doesn't make sense. It's very challenging-

James Mitchell:         'Cause it's a big business, isn't it? I mean you've got referral aggregators, it's a bigger industry than people realise before the ASIC rem review and before introducers ...

Peter White:  That it's significantly sizeable, and it is something that I see will be one of those outcomes, one of those plays that will go full circle through all this where I can see changes happening afoot there. I said ASIC was already in front of it, so ... by looking at it, scrutiny. But what's coming out through the commission at the moment is something that continue bringing a greater spotlight. It's hard with the general mainstream media, they don't get it. They just see it all as one, and even when you're looking at certain ... won't name names ... but certain franchise malls that don't understand between that and standard broking. And some of the comments there aren't necessarily factually correct either, so it's a difficult play between what happens in mainstream media who really don't get it versus the actuality of what's happening.

            And even our own industry sometimes struggles to understand the actualities of what a Royal Commission is. A lot of people don't realise you're basically playing in a court of law, but it's against a certain person or a certain group or a certain lender and them doing wrong, not necessarily, it's not the industry, it's that particular case. It's like a case matter, sitting in front of a court of law.

            The risk we have is that if they have findings against certain outcomes, can then become an issue to the whole industry, but the problem there is that just because one person or one group got it wrong, doesn't mean it's the same across the entire industry ... part of the further documentation we're doing at the moment ... so you can't tar everybody with the same brush, that's just unreasonable and unfair. It could be very, very isolated toward whatever that model happened to be. Fix it, correct it, fine them, whatever the outcome needs to be. That doesn't mean you destroy an industry over at the same time, either. You can't go to that extent.

James Mitchell:         It seems that the Royal Commission are pretty aware of that as well, they're aware of the value that brokers provide and that customers enjoy using that channel. I think, hopefully, when they come to-

Peter White:  Determinations.

James Mitchell:         Determinations and stuff like that, they'll keep that in mind. What I'm worried about is that you get a lot of that misreporting or a bit of hysteria happening in the mainstream media about some of the stuff we just discussed and that changes sentiment, consumer sentiment. I can't see that happening, but it'd be a shame if it does.

Peter White:  It would be a shame. As we know, somewhere north of 55%, 57% of people in the country use a broker to get a mortgage through. The majority of people are saying, "Great job, enjoying it." Not everybody does it, but that's freedom of choice, and I think it's very important that we don't lose choice.

            If you damage the broker sector, I go back in when I first started my banking career in the '70s and then more so greater learning through the '80s, there's no brokers in those days, not as we would know it today, that's for sure ... you just got this monumental dictatorship. Pricing that was vastly above cost of funds, no product innovation, no service ... people coming to your home to get a home loan for the people coming to represent you, that didn't happen. That was a broker initiative. And we forget, we lose all these things, all the great values of brokers. It's the same with pricing differentials, the margins'd come down, even though the Commission's saying, "Don't seem to be much competitiveness between the banks and so on, these days, so what's the value of the brokers?" Well, this is how it happened. What happens now is a monitoring to keep it in place, it keeps a lid on those things getting out of sync.

            They're all sitting there with their missions, and they all get some sort of outcome, there's gotta be some justification of outcome. There's gonna be something, what there has to be is relative to what the situation is and in the face of the Royal Commission it's gotta be relative to whatever the poor outcome is they've determined and dealt with at that point. Unless it's appropriate, and so far I'm not seeing a lot of that, but if it is appropriate it’d be even less appropriate, you cannot be systemic change in laws or regulation. And obviously that would require going back to government to change law. That's gonna have to go through the Senate, that's gonna have to go through the House, that's not gonna happen quickly, that's for sure. If that was the case, I don't see it being the case, but it's not like things are gonna change overnight, that's for sure.

Annie Kane:  I think one of the interesting things as well that we've been seeing is a theme in regards ... sorry, we keep chopping and changing with the commissions ... in regards to the Productivity Commission, which is looking at competition. One of key arguments we're seeing from people in this space is sort of saying, "Well, you know, the Combined Industry Forum is already doing work in this space. You haven't yet had time to see those changes come into effect, or to see the ramifications of what those changes will be, so it's almost premature to start even suggesting that things may need to be able to change because we've already got changes being put into place but we haven't seen the results of it yet 'cause it hasn't been long enough."

            Just in terms of what the Combined Industry Forum is doing now, I know that there's a lot of working going on in the background, but in terms of actually where we are in the reform package that was put forward, how far along are we until we will start seeing any sort of effects from it?

Peter White:  I can't talk for the Combined Industry Forum as such, I sit there, I'm part of it, first of all I'll say they're meeting again today. And I saw it too, I think it was from the Productivity Commission, say, "Well, they haven't done anything yet." That's not correct. Things were put in place to start from the end of last year, beginning of this year, with soft dollar commissions or incentive bonuses, that's already in place. So things like an extra thousand, fifteen hundred dollars per deal when you settle, all that sort of stuff's gone. Most of the industry's working towards, if not already implementing, their considerations around how conferences play out. They're still going overseas, but the place is appropriate, the educational content's appropriate, all that sort of stuff. These things are starting to play out.

            There's also, too, a hell of a lot of work. A lot of these things may not finalise until 2020, depending on what it is. It's all well and good for this group to go, "Yep, let's do this." But then you gotta implement. And some of those implementations will have significant cost to lenders, and they've gotta be properly thought out so it doesn't create damage to existing things that are happening there, doesn't create damage to an industry or what they're doing. In some cases, software technologies might need to evolve, and that could be a hugely expensive job and obviously is gonna take time.

            The Forum's doing, as far as I'm concerned, a great thing, in what it's trying to achieve. It's already got some benchmarks, and so far from what I can see, in the public information that's put out, they're meeting the timelines to date. Some things may move around a little bit, but so far it's moving along right. There's a lot of people involved too, you've got somewhere upwards, with all the workstreams, about a hundred people involved. It's not a small exercise. Anthony Waldron's chairing that, and doing an absolutely fantastic job with Mark Herron sitting as Vice Chair.

            It's a big exercise, it needsto have its time to play out. I had dinner with Kelly O'Dwyer, our federal minister, a few weeks ago, and we're talking about this, so I spent a bit of time in Canberra so I was having a bit of shot at Scott Morrison the week before, saying, "Come on, we need answers to this. We're waiting on you. What's gonna happen? Payouts gonna play out, and it's unfair for industry to be in this sort of hiatus period," and so on.

            And Kelly turned around and said to me, "We're getting a letter out." That letter's since been out, which basically said, they are supportive of what the Combined Industry Forum's doing, and they're encouraging to continue on the path they're at. That doesn't mean everything's gonna play out, but no decision's gonna be made until after the Royal Commission and the Productivity Commission's finished, so we're into next year before any further look is gonna happen outta the ASIC rem paper and a decision from a federal minister, 'cause that's where the decision comes from.

            And of course, we gotta be really careful, is as we get into next year, I can't remember if it's May or June, but around that period we're going into a federal election, so public servants are gonna stop working early next year because they won't know who the boss is gonna be, post that election. Same thing happened to us in February 2013, when we're in NCCP, too, when we were putting that together with Treasury. The whole thing stopped. Of course we did have a change of government, and a whole host of things didn't get picked up again, from what was being discussed then.

            It's really difficult at all ends of the stick. But what you gotta do is act in the best interest of the industry, the best interest of outcomes for the borrowers, with the understanding of what the regulator's looking at, and the directions as we had them from the minister.

Annie Kane:  In terms of a natural, practical step ... we always get a lot of brokers saying to us, "It's great that you're covering this, but what do I do now? What does it mean for me?" If you had to answer that question, of brokers coming to you and your association, saying, "What should we be doing? What should we be telling customers?" What would your advice be?

Peter White:  Mighty good question. I guess if they wanna make a political impact, the best thing to do is to write to your federal minister, don't write to your state minister, that's a waste of time, you need to write to your federal minister. Potentially write to Kelly O'Dwyer, who is our federal minister, but if you go the federal minister sitting not far from them, write to them, if you wanna take that move. I'm getting bombarded with people emailing me, and I respond to all of them, whether it be emails, LinkedIn. Not all of them are our members, but we are championing the cause for industry. We're not the only ones doing that, and I know that. You can write to me, you can write to Mike Felton, he's doing a good job with what he's doing. Speak to people.

            I'm very cautious with media comment because I can tell you now that the federal minister's offices and all these regulators are reading these comments. They read the blogs, and some of the blogs aren't necessarily polite, not necessarily on message, so those things actually is one thing I would be asking people to be careful about doing, not that you shouldn't, but be constructive and just be careful what you're saying isn't actually being damaging.

Annie Kane:  Yeah, we do actually have to monitor our comment section sometimes. A lot of things don't get through 'cause they're just defamatory or ... you can't just defame people.

Peter White:  And I think people need to understand that the work that Mike Felton and myself are doing is not an easy task, and not everybody agrees, but we are acting in the best interest of the industry at large. Kinda hope people have a bit of faith ... I've seen some things recently taking a slice at me, and that's all well and good, I've got broad shoulders, I don't really care about that too much, but I've also seen it on the reverse side as well. Everybody's having a crack at this, to make sure that we get the best possible outcomes ... it's not an easy journey, it's unique. This year ... 2018, yep, this year I head into my fortieth year of being in this industry, and with all that time that I've been in this game, never has there been a period like this. It's completely uncharted waters, and it's a tough gig for everyone, you guys as well.

Annie Kane:  Well, we look forward to seeing what the Combined Industry Forum has in store for us in the rest of this year, and also what will happen with the Productivity Commission report at the middle of this year, and the Royal Commission report next year.

Peter White:  We'll have some more very shortly for you, as well, from the FBAA.

Annie Kane:  Well, I'm sure if you have any questions for Peter, he is, as he said, free to email to and he'll respond, turns out he's on air saying that he'll do it.

James Mitchell:         Join the bombardment.

Peter White:  I respond to everyone.

Annie Kane:  And obviously if you have any questions for us, then please do email us too. We can be reached This email address is being protected from spambots. You need JavaScript enabled to view it.. That's it for today, so thank you so much for coming on, Peter, and sharing your thoughts, and thank you all for listening as well. We'll catch you next week.