Commissions: The hardest balancing act

The Combined Industry Forum has released its recommendations on commissions, attempting to satisfy the Government, ASIC, consumers and brokers

By simply making any recommendations at all, the Combined Industry Forum (CIF) can be considered a triumph. The industry has come a long way since 2016, when brokers and banks turned on each other over commissions, much to the delight of critics of the third party channel. Less than two years later, broker associations, bankers, consumer advocates and others have come together to reply to ASIC, whose Review of Mortgage Broker Remuneration began this whole process.

As the CIF made clear, its recommendations will be implemented. Commissions will change, whatever ASIC or the Treasury says. Yet the CIF’s recommendations still need to achieve their primary goal of preventing regulatory intervention in the sector. That’s alongside avoiding putting brokers and banks out of business, while protecting consumers. But is this balancing act even possible?

“There has been so much change in responsible lending I don’t think it’s going to make that much difference to [brokers’] current behaviours” - Mike Felton, MFAA

Commission changes

The headline reform proposed by the CIF is to base remuneration on drawdown net of offset. The CIF wants to “avoid financial incentives that encourage consumers to borrow more than they need or will use”.

Worryingly for brokers, the CIF has gone against recommendations made by the MFAA, the FBAA and aggregators in their initial responses to ASIC earlier this year. The MFAA dubbed the drawdown net of offset arrangement as “unlikely to be suitable”, noting that the “unintended consequence could be to not pay commission on funds placed in offset for a renovation or deposit on investment property or any other legitimate imminent use”.

Talking to MPA after the CIF published its recommendations, MFAA CEO Mike Felton said the commission-model debate “was without doubt the most difficult [issue] to solve”, but that offset had been called out as a “non-negotiable” by both the ASIC and Sedgwick reports and thus “had to be addressed”. FBAA executive director Peter White said the new arrangements were “commercially fair” to lenders.

In an online poll of brokers by MPA, with several hundred respondents, 63% said they were against basing commissions on facility drawdown net of offset, and 25% were in favour. Offset balances are not a niche issue: they represent 16% of outstanding loan balances. Yet the CIF’s reforms fall well short of ASIC’s suggested changes, such as tying remuneration to LVR. It’s not yet clear whether the Treasury will be prepared to compromise. 

Good customer outcomes

In the long term, the greatest legacy left by the CIF may be around compliance. For the first time in mortgage broking history, a ‘good customer outcome’ has been defined by the industry.

The CIF defines a good customer outcome as when “the customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan”.

Additionally, lenders will report back to aggregators on ‘key risk indicators’ of individual brokers. These include the percentage of the portfolio in interest-only, 60-plus-days arrears, switching in the first 12 months of settlement, an elevated level of customer complaints, or poor post-settlement survey results.

MFAA CEO Felton downplayed the impact of the change, noting that “there has been so much change in responsible lending I don’t think it’s going to make that much difference to their current behaviours”. While consumer advocates such as CHOICE wanted brokers to be held to the same standards as financial advisers – to act in the customer’s best interests – brokers will not be legally bound to good customer outcomes, although an industry code will apply.

While the prospect of brokers in court over (not so) good customer outcomes is no doubt unappetising, the introduction of the standard is essentially a fait accompli. Prior to the CIF’s recommendations, ANZ and CBA introduced new interview guides and tools aimed at ensuring customers could afford and understand the loans they were seeking. APRA has also signalled a renewed focus on living expenses, which will dominate broking news in 2018.

Data-driven governance

To use a phrase beloved of industry leaders, the CIF’s recommendations do indeed represent a ‘new era of professionalism for the industry’. Or, at least, a new era of monitoring.

Individual brokers will be issued with a unique identifier number that stays with them throughout their career. Felton told MPA that being able to track individual brokers would help make governance ‘data-driven’; insights from file monitoring could drive remedial training and professional development. In fact Felton describes the governance framework as “the centrepiece, the absolute glue, in the reform package”.

Furthermore, brokers will have to disclose information on their spread of lenders, as will aggregators. Lenders will have to disclose average pricing across different distribution channels.

The new era of professionalism is already upon us, as any recent visitor to a straightlaced broker conference can attest. Lender spending will be limited to $350 per broker, outside educational content, and locations “must be business appropriate and not likely to cause reputational harm to the industry”.

More regulation, not less

By presenting a series of significant changes with clear deadlines, the CIF may succeed in preventing the Treasury and ASIC from introducing more serious changes. Yet as FBAA boss White has noted, the industry can “never truly self-regulate”; even with the development of an industry code, ASIC will still be responsible for licensing brokers, and APRA for supervising banks. “The industry can have input and offer guidance on possible measures and outcomes,” White explains, “but the decision is made by the minister.”

In fact, far from ensuring business as usual, the CIF may have made it easier for regulators to intervene. With a huge amount of data readily available, ASIC will not have to repeat the vast investment required for the Review of Mortgage Broker Remuneration. Instead of set-piece reports and debates, regulation will be constant and, hopefully for brokers, in the background. Then brokers can get on with running their businesses.