ASIC could prohibit remuneration structures under proposed law

It included responses to calls for information on whether upfront and trail commissions should be replaced with flat-fee payments, and how any “genuine commercial impediments” to changing broker remuneration could be overcome.

ASIC reiterated the findings of its Review of mortgage broker remuneration, which recommended that the industry move away from volume-based incentives and “improve” the structure of the standard commission model.

ASIC said that it believes bonus commissions/payments paid to brokers and lenders’ staff create conflicts of interest, which can result in “misconduct and poor consumer outcomes”.

While ASIC did note that a flat fee paid by the lender to the broker would “appear to avoid product strategy conflict, decoupling the size of the commission or payment from the size of the loan removes the incentive to recommend larger loans”, it did claim that such a model would still be subject to conflict, as one lender might offer a larger flat fee than another lender.

Further, ASIC warned that any reforms shifting to a fee-for-service model should consider how the change might impact:

• the mortgage broker market, such as market consolidation
• the broader mortgage loan industry, such as change in dynamics between smaller and larger lenders, market concentration and contestability
• consumers, including consumer access, choice of products and services, and consumer decision making

Proposed law could enable ASIC to ban certain remuneration structures

Notably, the financial services regulator later highlighted one way that could enable lenders to change their remuneration structures without creating a commercial impediment.

ASIC outlined that “collective action problems can, at times, make industry-wide reforms difficult for industry participants to achieve, and may therefore require regulatory action”.

It highlighted that a new law, which is currently under consultation by the Commonwealth Government, is a product intervention power that includes the power to prohibit remuneration structures that create unacceptable risks to consumers.

ASIC elaborated that the proposed Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, which closed for public consultation in February 2018, would “empower ASIC to regulate (by requiring alteration to) or, if necessary, ban potentially harmful financial and credit products where ASIC is satisfied that a financial product has, will or is likely to result in significant consumer detriment”.

If legislated, such a power would have application in consumer credit markets, and beyond, and could change broker remuneration, should it be deemed to be of detriment to consumers.

The law was first recommended in the Financial System Inquiry, which found that early intervention by ASIC could be more effective in reducing harm to consumers compared with waiting for a breach of law or significant consumer detriment to occur. 

The government accepted this recommendation and the exposure draft contemplates that the power will apply to all products that may be provided by a person in the course of engaging in a credit activity (credit contracts, mortgages and guarantees, and consumer leases).

ASIC told the royal commission: “The power could have significance for issues of remuneration and first-mover problems of the kind identified by Counsel Assisting. 

“ASIC considers that the intervention power is intended to, and in any case should, extend to allowing ASIC to make prohibitive orders in respect of the remuneration that is linked to a product.”

It continued: “Given that significant consumer detriment in financial services is caused by the misaligned incentives constituted by remuneration structures, a product intervention power that can reach those structures would equip ASIC to help break first-mover deadlocks that emerge in the future, by expression prohibiting remuneration structures that result in significant consumer detriment.” 

The financial services regulator also said: “The extension of proposed design and distribution obligations to consumer credit products is also desirable, as improved and ongoing transparency can also assist to overcome the ‘first-mover’ impediments.” 

Higher standards should apply to brokers

ASIC later told the royal commission that it believes the reforms announced by the Combined Industry Forum (CIF) will “ameliorate the conflicts of interest that Counsel Assisting have identified” and considers it to be a “positive step by the industry towards addressing the concerns raised in ASIC’s Report 516”.

It concluded that while it “remains to be seen” whether these industry-led changes “will be sufficient”, it stated that ASIC “remains supportive of continued strengthening of standards across the mortgage broking industry, and considers that higher standards should apply to all mortgage broking businesses (regardless of ownership structure).”

The financial services regulator stated that its shadow-shop exercise into mortgages aims to “follow actual consumers through their home loan purchase journey (including both loans purchased via brokers and direct from lenders)” and will inform its regulatory work moving forward, including whether any law reform is required.

[Related: Royal commission scrutinises broker remuneration]