History does repeat and there is much the Australian mortgage broking industry can learn from familiarising itself with the events which led up to the imposition of the Future of Financial Advice (FOFA) regime on the financial planning industry.
When the Minister for Revenue and Financial Services, Kelly O’Dwyer in mid-March released the Australian Securities and Investment Commission’s (ASIC’s) Review of Mortgage Broker Remuneration for public consultation, she was in many ways emulating one of her predecessor’s: Labor Shadow Treasurer, Chris Bowen.
It was Bowen, who in April 2010 as the Minister for Financial Services, Superannuation and Corporate Law in the Rudd Government announced the first FOFA package in the following terms:
“The Future of Financial Advice package includes the following:
- A prospective ban on conflicted remuneration structures including commissions and volume based payments, in relation to the distribution and advice of retail investment products including managed investments, superannuation and margin loans. The measure does not initially apply to risk insurance;
- The introduction of a statutory fiduciary duty so that financial advisers must act in the best interests of their clients, subject to a ‘reasonable steps’ qualification, and to place the best interests of their clients ahead of their own when providing personal advice to retail clients;
- Increasing transparency and flexibility of payments for financial advice by introducing ‘adviser charging’ that will help align the interests of the financial adviser and the client; is clear and product neutral; and where the investor will be able to opt in to the advice in response to a compulsory, annual renewal notice;
- Percentage-based fees (known as assets under management fees) will only be charged on ungeared products or investment amounts and only if this is agreed to with the retail investor;
- Expanding the availability of low-cost ‘simple advice’ to provide access to and affordability of financial advice;
- Strengthening the powers of ASIC to act against unscrupulous operators; and
- The examination of a statutory compensation scheme by Mr Richard St John, who has significant corporate law experience.”
Bowen’s first iteration of FOFA was based on the Government’s response to the Parliamentary Joint Committee on Corporations and Financial Services’ Inquiry into financial products and services in Australia and that inquiry was itself informed by evidence received from ASIC.
Thus the circumstances which have given rise to the ASIC review of mortgage broker remuneration has many parallels with the circumstances which gave rise to FOFA, and the mortgage broking industry has reason to consider the implications for the sector and particularly the manner in which mortgage brokers are remunerated.
This is particularly the case given that the ASIC review states almost from the outset that the standard commission model pertaining to the mortgage broking industry is conflicted.
Describing the commission regime, the ASIC review stated:
“This standard model of upfront and trail commissions creates conflicts of interest. There are two primary ways in which these conflicts may 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). In this report, we have referred to this as a ‘product strategy conflict’. 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 refer to this as a ‘lender choice conflict’.”
Similar to the thrust of the FOFA changes, the ASIC report not only identifies the commission structures applying to mortgage brokers but, in the same way financial planning dealer groups were impacted, it references volume-based commissions paid to aggregators.
The bottom line assessment of the ASIC review is that, for the most part, the existing remuneration structures are either conflicted or seriously capable of giving rise to the perception of conflicts of interest and certainly not consistent with client best interest.
In a manner also reminiscent of the findings which gave rise to FOFA, ASIC has also called out soft dollar benefits such as loyalty programs, travel and hospitality-related benefits and so-called “broker clubs”.
All these things would be familiar to financial planners and dealer groups who had to deal with the FOFA processes and there seems little doubt that, as it was in the financial planning industry, the most in-demand people in the mortgage broking industry over the next five years will be compliance specialists.
