Brokers would not ‘thrive’ under advice model: NAB

Mr Chronican noted that the bank had recently issued its formal response to the final report, which backed 72 of the 76 recommendations put forward by commissioner Hayne.

When asked what the exceptions were, Mr Chronican emphasised that two of these exceptions related to mortgage broking – and outlined that the move to change remuneration and bring brokers in closer alignment (and under the same regulations) as wealth advisers would require considerable consultation and delicacy.

‘A fundamentally different industry’

The NAB interim CEO commented: “The recommendation from the commissioner in the final report was quite confronting for everybody, including the mortgage industry.

“We are strong believers in the need for the mortgage broking industry to continue to thrive. We think it plays a very valuable role in the market – it provides an alternative access point, it provides competition and it provides access to a whole range of borrowers.”

He continued: “We think that the better path on this is for a review to be done into the structure of mortgage broking. Because the model that we have today – with upfront commission and trail, where the bank pays – is a model that sees the mortgage broking industry as a distribution channel for banks.

“The model that the royal commission report paints is as an advice channel for borrowers. That is a fundamentally different industry,” he said.

“So, I don’t think you can just say: ‘We should just change the commission structure tomorrow on this industry’ and then turn it into ‘that industry’. There is actually a bigger transition required on that.

“So, we are supportive of a review of the mortgage broking industry to find a way that it continues to play a significant, important role so that people can have access to brokers and do so in a way that the mortgage commission structure doesn’t constitute conflicted remuneration. But we don’t think the answers coming out of the royal commission’s report [will get us there].”

‘That is a change that the broking industry today is not ready for and would not thrive under’

When asked by the committee whether the best interests duty could be implemented with lenders continuing to pay commissions, the NAB interim CEO and its chief financial officer, Gary Lennon, suggested that this would be problematic given that it would be conflicted remuneration.

Mr Chronican explained: “The best interests duty is what takes [broking] to a different industry than it is today. The mortgage broking industry today was set up as a distribution channel for banks. So, I’m not saying we shouldn’t have a best interests duty in favour of the customer, but that is a different industry than we have today and therefore would warrant a different commission structure...

“If you [bring in] a best interests duty to mortgage brokers and you get rid of conflicted remuneration in that model, then you go to what the royal commission has recommended. And that is a change that the broking industry today is not ready for and would not thrive under,” the NAB interim CEO said.

“We agree with that intent of the recommendation, but the industry is not ready for it.”

When pushed to clarify why a best interests duty could not be implemented with a lender-paid upfront commission (and no trail), Mr Chronican said: “I don’t believe that is consistent, because it is a conflicted remuneration – you are not being paid by the person in whose interest you are meant to be operating.”

The CFO, Mr Lennon, added that changing the broker model was a “complex question”.

“Why we support a longer-term review of this is that there are some quite complex issues in this. When you really step back and assess what the royal commission is recommending and then you look at how you have a thriving mortgage broking industry... you start to get to these dilemmas; you agree with the best interests portion, but is that consistent with trail commissions and upfront where it is paid by the bank? [Because] there you have conflicted remuneration.

“So, we don’t have the answers, but a discussion is the right thing as the next step to work through that,” he said.

“We don’t agree for any quick change. We think we need to be very thoughtful and considered around what change we [make] in this space, primarily because of these elements of complexity.”

NAB reliant on brokers 

When asked whether the bank (and its shareholders) would benefit if there “wasn’t a vibrant mortgage broker industry”, with borrowers instead having to go direct to the bank, Mr Chronican replied that while there might be some “short-term benefit”, he believed that the mortgage broking industry has “actually played a really important role in the housing market in Australia over a long period of time”.

“We’re the smallest – by way of footprint – of the big four banks so, actually, we’re as reliant on mortgage brokers to bring us business because we don’t have the largest distribution footprint.

“So yes, there is a tension between our own distribution channel and the mortgage broker channel, but we are big supporters of the mortgage broker industry and we would like to see it thrive.”

When asked whether he would have a different opinion if the bank had a larger distribution footrprint, Mr Chronican said: “From a hypothetical view point, I’m sure if I had the biggest branch network, I might feel a little differently about it.”

The remaining two recommendations that the bank did not agree to was the change in definition of a small business (from total borrowings of $3 million to $5 million for each loan) and the recommendation that a single executive of an organisation be accountable for all the end-to-end product processes.

[Related: NAB stands firm on broker front in Hayne response]