The mortgage broking industry appears to be facing its own version of the Future of Financial Advice (FOFA) changes as a result of the Australian Securities and Investments Commission’s (ASIC’s) review of mortgage broker remuneration released this week.
The review, released by the Minister for Revenue and Financial Services, Kelly O’Dwyer, has made adverse findings reminiscent of those which preceded the Government’s pursuit of the FOFA changes in the financial planning industry.
Squarely in the regulatory crosshairs are the remuneration models being pursued in the mortgage broking arena, with ASIC’s analysis suggesting the “standard model of upfront and trail commissions creates conflicts of interest”.
ASIC has put forward six proposals “to improve consumer outcomes and competition in the home loan market, including:
(a) Changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) Moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) Moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) Clearer disclosure of ownership structures within the home loan market to improve competition;
(e) Establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) Improving the oversight of brokers by lenders and aggregators”.
Releasing the ASIC findings, O’Dwyer acknowledged that the review had found that “some aspects of the current mortgage broker remuneration and ownership structures could create a conflict of interest that may contribute to poor consumer outcomes”.
However she announced a three-month consultation process saying it was important for the industry to consider the ASIC report and provide feedback.
Dealing with the question of how conflicts of interest arose from the mortgage commissions’ regime, the ASIC report said there were two primary ways in which such conflicts might become evident: “Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan)”.
It said that, alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer.
“We found that commissions may be paid in a way that could result in product strategy conflict. In general, because commissions are linked to the size of the loan, the more that a consumer borrows, the more the broker will be paid. In practice, we found it common for remuneration structures to pay commission on the total amount of borrowing approved, rather than the amount of funds actually drawn down,” the ASIC report.