Broker remuneration seems to be an obsession for those outside of the industry, but tensions boiled over recently when two major bank CEOs gave a masterclass in deflection when they said broker remuneration may need to be looked at.
The CEOs of the Commonwealth Bank of Australia (CBA) and Westpac incensed the industry in what seemed like an unprovoked attack on broker remuneration.
It all started during the standing committee on economics’ review of the major banks on 29 August. The two CEOs, Matt Comyn (CBA) and Peter King (Westpac), were asked about the potential risk caused by removing bonus caps for bankers recommended by the Sedgwick Review (a move taken by CBA and NAB recently, which has drawn criticism from the financial services regulator).
In response, the CEO of Australia’s largest retail bank, Comyn, pointed to the lack of caps on mortgage broker pay, saying they, too, should be reviewed if there are concerns about inappropriate lending behaviour
What was said?
Comyn told the big four bank review: “Stephen Sedgwick’s review of remuneration practices focused principally on retail banking. There were a number of changes to the way people’s performance was being measured and the way the remuneration was structured. There were, from recollection, two specific recommendations to the mortgage broking industry that were never implemented.
“The rest of the recommendations were implemented. Some of those recommendations applied to proprietary lenders, in this case, and restricted the maximum that you could be paid as a variable or – using words to simplify it – a bonus as a proportion of your fixed pay. For example, if you were earning $100,000, the maximum would be 50 per cent, so $50,000. We have lenders on fixed pay, and a small proportion would then qualify for an increase, versus 50 per cent of their fixed pay to 80 per cent.”
The CEO, who has drawn ire from the industry in the past for his comments on changing broker remuneration and the bank’s more recent focus on proprietary distribution (which has seen direct originations increase), particularly emphasised that there were more brokers than CBA home loan bankers and that brokers write the majority of mortgages now.
He said: “To make the comparison – and I’m certainly not alleging that this is a problem per se in the mortgage broking industry – we have 1,800 home lenders, and there are approximately 20,000 mortgage brokers.
“Since 1995 mortgage brokers have grown very successfully to become about 72 per cent of mortgage origination. There is, as a matter of fact, no balanced scorecard. There is no fixed pay. They are entirely remunerated based on the number of loans they sell. I’m sure this has been extensively reviewed. They have their own regulatory obligations and things that have come in from a best-interest[s] duty perspective.
“We felt that we were putting ourselves at a significant competitive disadvantage. We thought the remuneration practices that we were limiting our people to were unfair. We still see it as a much lower risk channel than the mortgage broking channel.
“[I]t simply cannot be that there is an undue level of concern over it. We are talking about a few hundred lenders versus the 20,000 mortgage brokers that don’t have any of the controls that we’re talking about in this regard. So I certainly acknowledge these concerns, but they must, at the same point, be dwarfed by concerns in other aspects of the industry.”
Westpac CEO King echoed these concerns later in the day when questioned by the committee: “The original Sedgwick recommendation was to have caps in the whole industry, so across banks and mortgage brokers. But it ended up that that wasn’t what happened in the market. Mortgage brokers do not have caps. Since the royal commision, we’ve been operating as banks at a different level of variable reward for home finance mortgages to brokers.”
Westpac is also currently reviewing extending its bonus caps beyond the limits put forward in the Sedgwick Review.
King said that any caps should therefore apply on an even playing field, if at all.
He said: “I’d say on industry and policy that there is a lot of focus on the banks, but we only write one in four mortgages now. If you go back five or 10 years ago, it used to be one in two were written through the banks. Now, three-quarters of mortgages are written by mortgage brokers. If you’re worried about there being an incentive issue in the market, then it really should be a standard that’s applied to the whole market.
“[I]f the corporate regulator and some of the commentators in the industry believe that there could be issues, then I think we need to have a cap for the whole system. You can’t have the smallest part of the market, which is the banks now, at a different point to the others because I think the systemic risk is actually higher in the mortgage broker piece.”
‘This is such garbage from the banks’: FBAA
Members of the broking industry have lambasted the comments, particularly as banker bonus caps are paid on top of annual salaries, whereas brokers are only paid commissions for the loans they settle.
Moreover, brokers are legally obliged to act in the best interests of their clients – a duty brought in following the royal commission – which bankers are not.
Speaking to The Adviser, the managing director of the Finance Brokers Association of Australia (FBAA), Peter White AM, said the banks seem to have quickly forgotten their commitment to the outcomes of the Hayne royal commission (the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry), which he said was an investigation into poor bank superannuation and financial services conduct.
White said the banks were “not honouring” the bonus caps recommendations put forward by the Sedgwick Review (and backed by the royal commission): “If they [the banks] are not paying their employees enough then they should increase the base salaries, and not incentivise the risk of bad behaviour by [paying] such higher incentives, especially given bank employees do not have the obligation to abide by the best interests duty, as do brokers.
“Dragging brokers into this conversation is a smoke screen for their own bad bank behaviours.
“Brokers can earn nothing one month and the next they may make something, but still have to live with the risk of a clawback; there are no safety nets and NO base salaries at all.
“This is such garbage from the banks. If they love their employees then [they should] up their base salaries.
“How many billions of dollars in profit do they need to make? $10 billion [recorded by CBA this financial year] obviously isn’t enough.”
White said that the issue of broker commissions had already been placed under rigorous scrutiny in the past decade, including during the Sedgwick and ASIC reviews on broker remuneration and the royal commission, And, after the industry defended its stance on broker commissions, eventuated where both sides of politics agreed not to pursue any changes to broker remuneration.
He said that the FBAA had provided both government and the opposition data showcasing why broker commissions were not problematic and that nearly all borrowers had no problem with broker remuneration.
‘Convenient opinions couched as facts’: MFAA
The CEO of the Mortgage and Finance Association of Australia, Anja Pannek, also hit back at the positioning, saying the comments were “more than anything, convenient opinions couched as facts”.
She said: “I doubt anyone in the mortgage broking industry was surprised. The failure of banks to uphold their commitments on banker remuneration made in response to the Sedgwick review, justified as a need to remain ‘competitive’ and ‘manage risk’ is at best self-serving and at the very worst, misleading.”
She said that broker remuneration is regulated under law, but banker pay is not, adding there are checks and balances on broker conduct through licenses, aggregators, and risk teams within lenders.
The MFAA CEO said that comparing broker commissions with the salary and bonuses of bankers is “like comparing apples with oranges”.
“Broker commissions are not a salary, they are business revenue. Out of their commissions a broker pays for the costs of running their business, all costs that a banker does not incur,” Pannek said.
Pannek went on to tell The Adviser that the bank CEOs failed to mention the requirement for brokers to comply with the conflict priority rule; the fact that broker commissions are paid net of offset; or “the banning of volume-based bonuses, soft dollar payments and other incentives”.
“Let’s call the commentary for what it is – a deflection against regulatory and parliamentary scrutiny and a fear of the competition that brokers bring to the mortgage market which translates to better outcomes prices for consumers,” Pannek said.
“Ultimately Australians have choice. And we know who they are choosing.
