The Future of Financial Advice (FoFA) ban on conflicted remuneration should be extended to home loan products, according to the Consumer Action Law Centre (CALC).
In a submission filed with the Productivity Commission (PC) inquiry into Competition in the Financial System the CALC dismissed mortgage industry proposals for change and said “the problem of trail commission remains and upfront commissions continue to encourage brokers to sign up consumers to larger loans”.
“We recommend that the ban on conflicted remuneration introduced under the Future of Financial Advice reforms be extended to home loan products,” the submission said. “The structure of mortgage broker commissions indicates reverse competition, rather than any rationale based on improving outcomes for consumers.”
“The Royal Commission recently heard evidence of the consumer harm caused by conflicted remuneration in the home loan sector. The incentives for brokers and bank staff to engage in irresponsible lending were particularly perverse,” the CALC submission said.
It said the evidence presented to the Royal Commission had also suggested a systemic failure of lenders to manage the resulting conflicts of interest effectively.
“As flagged by the Commissioner during the Royal Commission hearings, currently there is 'nothing in it' for a broker to ensure the customer is facing the truth of his or her expenditure, or to 'interrogate the customer when the customer reports living expenses as X dollars a month’,” the submission said.
Comments
I would take everything said by legal firms in regard to financial services with a pinch of salt. These firms want to remove Insurance advisers from the insurance process so that they can handle the insurance claims and charge the client thousands of dollars to do so. I assume they see a way they can make some money by removing access for clients to independent mortgage brokers by removing commissions.
The problems with removing commissions for mortgages are the same as what is already happening in the Life Insurance sector. Consumers do not have the expertise, knowledge, experience or time to decipher one mortgage/insurance/superannuation contract from another. Removing commissions will remove independent brokers and consumers will have to go direct to the provider who will sell their company's product regardless of whether its better or worse than the other products available.
Unadvised insurances are more expensive and far inferior to advised policies. The policies are not tailored to the clients needs and are a waste of money. This will happen in the mortgage sector if you remove commissions (and therefore brokers). The lenders will be able to write whatever they want into the contracts and we will see consumers ripped off even more by the banks.
Just extend the Best Interests Duty to all financial sales both direct and advised, whether its superannuation, mortgages, car/business finance, insurances.
Why don't they go after super funds, investment products, and anything that charges percentage management fees? That way they can improve things for everyone, not just the very few that are affected by whether a broker or lender increased a loan by $5,000 to receive $25.
Jake is right that applying BID, and confirming in law that a Mortgage Broker acts for the borrower, not the bank, should be sufficient to get client focused outcomes everyone desires. However, having seen the beneficial effect of removing commissions in financial planning/investments, I would suggest that the Mortgage Broker industry should not fear banning of commissions. Brokers will charge a fee and have true freedom to select the best mortgage product for their client. The clients will have more faith that your advice is not biased. You'll still have to disclose how many pens and sandwiches the banks bribe you with though!
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