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The implementation of Sedgwick’s 2017 recommendations on mortgage broker and aggregator remuneration remains behind schedule, an ABA-commissioned update report has concluded.
Stephen Sedgwick, a former public service commissioner who was tasked by the Australian Banking Association to conduct a review of remuneration in the retail banking industry, has concluded that while the banks are on track to meeting their 2020 deadline for overhauling staff pay, the industry “has not responded satisfactorily” to the changes he suggested to reduce the “inherent risks” in the mortgage broker and aggregator remuneration models.
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In the first Sedgwick report, which was published in April 2017, he presented a number of recommendations on removing “inherent conflicts” in broker and aggregator remuneration models, including that:
- Long trails should be abolished, but “a modest element” of deferred remuneration should be retained.
- Lenders should provide a “fee-based upfront payment” to brokers that is based on the complexity of the loan and/or the effort required to secure the loan rather than based on the size of the loan.
- Lenders should stop providing volume-based incentives that are additional to upfront and trail commissions, as well as providing non-transparent soft dollar payments in favour of more transparent methods to support training, etc.
- Lenders should stop the practice of increasing the incentives payable to brokers when engaging in sales campaigns.
Mr Sedgwick acknowledged that mortgage broker remuneration has been a “hotly contested public policy issue”, with the debate on how brokers should be paid intensifying since the release of his recommendations in 2017, especially after commissioner Kenneth Hayne advised that lender-paid commissions be replaced with a borrower-pays model.
There continues to be uncertainty around what action the next elected government will take in response to the banking royal commission’s recommendations, Mr Sedgwick wrote, and so it is understandable that there has been some reluctance to take action on his proposals.
“I understand also that some who may have preferred a fee-based model felt constrained in taking unilateral action (and the competition law precludes collusion), including fears that the first mover disadvantage could be significant while the industry adjusted,” he continued.
While Mr Sedgwick questioned the longevity of trailing commissions, saying that it is “difficult to justify”, he advised that some component of deferred remuneration should be retained to “better align broker, banker and customer interests around arranging a loan that best meets the customer’s needs, as understood at the time the loan is taken out”.
Both major political parties were firm in their initial statements that they would be implementing commissioner Hayne’s 76 recommendations, but have since backpedalled.
Following widespread campaigning and lobbying by the broking industry, the Liberal Party announced that, if re-elected, it would look at reviewing the impacts of removing trail in three years’ time rather than abolishing it next year as originally announced, while the Labor Party proposed that lenders instead pay brokers a standardised upfront commission as a proportion of the loan amount. It suggested that commissions be capped at a fixed rate of 1.1 per cent.
Mr Sedgwick also suggested that lenders should work with the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission to move towards a lender-paid fee-for-service model “that preserves the viability of the third party channel but links payments to the effort expended in securing the loan for the customer rather than the value of the loan secured”.
“[It] is clear that there are concerns that brokers may not have the market power necessary to secure a price sufficient to preserve the long-term viability of the mortgage broker sub-sector,” he noted in his update.
The former commissioner additionally advised that a further review of the implementation of the recommendations be conducted in 2021.
“Hopefully, the legal and regulatory framework within which mortgage broking operates will have been clarified by the time of the 2021 review,” he wrote.
On the other hand, lenders have been found to be on track to meet their 2020 deadline to overhaul staff remuneration.
Mr Sedgwick wrote that in 2018, four banks continued to measure variable remuneration based on at least one financial element of a scorecard in isolation from the other elements.
However, no bank “overly calculates in 2019 variable remuneration for retail staff solely by direct reference to an individual’s performance relative to their sales targets”.
But more work is required to “minimise the risk that sellers will receive ‘mixed messages’ about the importance of sales”, according to Mr Sedgwick.
[Related: Treasurer delays trail abolition date]
