Consumer bodies call for ASIC review of broker remuneration

In the submission to the Senate economics references committee’s inquiry, the consumer groups said that the government should “address industry remuneration structures that lead to professionals recommending inappropriate loans or encouraging people to take on more debt”.

The submission said: “Over the last decade, there have been a large number of inquiries and initiatives to address conflicted remuneration in the financial services sector. As part of this, payments to bank staff involved in lending and mortgage brokers have rightly come under scrutiny. When financial services staff are incentivised to encourage consumers to borrow more, this can introduce increased risk into our financial system and mean that more Australians take on unaffordable levels of debt.

“The Committee needs to consider how to strengthen protection in this space and how to test if existing protections are working.”

The groups cast doubt on the quality of the services provided by brokers in the submission, stating that – alongside conflicted remuneration paid to bankers for mortgage sales – “the other source of potential harmful lending advice can come from the mortgage broking sector”. (Little evidence was provided to back these accusations).

While the bodies noted that a best interests duty was introduced for brokers following the banking royal commission (and came into force on 1 January 2021), they said that “it has not been substantially tested by the regulator”.

The submission said: “We have no sense of how many brokers are complying with the best interest duty. Crucially, we do not know how many brokers are recommending good quality loans from a variety of lenders to their customers.”

As such, it recommended to the Senate inquiry that it should “confirm if mortgage broker market protections are working ASIC should be directed to undertake new research into mortgage broker remuneration and the quality of recommendations by brokers.

“With mortgage brokers now arranging most loans in the home lending market, regulators need to test if legal protections are working and if brokers are helping or harming competition in the market in 2024,” it said.

The groups also suggested that the committee recommend new laws to formalise the recommendations of the 2017 Retail Banking Remuneration Review, including that retail banking staff are not paid directly or solely on sales performance.

Its submission said: “In 2024, major banks have stepped away from their commitments to curb conflicted remuneration in lending. Major change has come from Commonwealth Bank (CBA), which has changed how it structures bonuses to preference sales results. Westpac and NAB quickly followed CBA’s lead.

"This shows that banks cannot be trusted to self-regulate conflicted remuneration. Like with financial advice, limits on conflicted remuneration should be formalised in legislation rather than left for reversible industry commitments.”

Other recommendations put forward by the consumer groups included:

1. Retain safe lending protections – preserving responsible lending obligations to ensure ongoing consumer protection from harmful financial products and irresponsible lending.
2. Address first home buyer affordability by lowering the cost of housing – by assessing how recommendations will address housing affordability, particularly for first home buyers, with a goal of stabilising or decreasing house prices rather than increasing levels of debt.
3. Make it easier for people to get a good deal on their existing home loan – including by encouraging tracker mortgages and other market interventions to support existing customers, including some of the recommendations from the March 2024 Better Competition, Better Prices Report (such as requiring banks to review loans older than three years and adopt a public RMBS scheme).
4. Explore how to introduce long-term fixed interest rates to Australia – by directing the Productivity Commission to investigate how governments could intervene in the lending market and make mortgage costs more predictable for people by enabling Australian mortgage holders to secure long-term fixed interest rates.
5. Further regulate non-bank lenders – by regulating non-bank lenders to be “more on par” with bank lenders to ensure consistency across all lending providers.
6. Explore ways to standardise hardship help – by investing in further research and directing APRA to assess how to introduce minimum offers for people experiencing hardship (such as a two-year mortgage repayment pause).
7. Provide greater support for people experiencing hardship - by increasing federal government funding for the National Debt Helpline and frontline services working to help people in mortgage stress.

Next steps

The first hearing for the Senate economics references committee’s inquiry into the financial regulatory framework and home ownership has released around 69 submissions from respondents to the consultation.

On Wednesday (16 October), it held its first hearing, where several members of the broking industry were asked about their thoughts on how serviceability buffers were impacting mortgage lending and home buying in Australia.

Following the hearing, senator Andrew Bragg released a statement excoriating the prudential regulator.

The next public hearing is scheduled for Thursday (24 October). It is not yet known who will appear at this hearing.

The final report for the Senate inquiry is due by 5 December.

Read the full recommendations put forward by the FBAA, the MFAA, and several brokers to find out what the industry suggested to the inquiry.

[Related: ‘I want to hear from brokers the most’ for housing inquiry: Senator Bragg]