Brokers have to abide by BID, unlike bankers, says Sam White
Sam White, the head of Australia’s largest aggregator, LMG, has defended mortgage brokers in the face of criticism from the CEOs of Commonwealth Bank and Westpac that brokers, unlike bankers, have no restrictions on their pay.
CommBank CEO Matt Comyn (pictured above, second from left) and Westpac CEO Peter King (pictured above, far right) fronted the House of Representatives standing committee on economics on Thursday where the prickly issue of bonuses for bank employees who serve mortgage customers was raised.
The CEOs’ comments that brokers are not subject to the same restrictions on bonuses that bank employees are, that they don’t have the same controls as bankers do, and that brokers pose a greater risk than bankers, have drawn the ire of the mortgage broking industry, including the MFAA, FBAA and LMG executive chairman Sam White.
Reacting to Comyn’s and King’s comments via a LinkedIn post on Friday, White (pictured above left) said the big bank CEOs had taken aim at broker pay, claiming brokers don’t have ‘guardrails’ like the banks did.
“But here’s what they’re not saying: brokers are held to a Best Interests Duty - a legal obligation to put clients first every time,” said White. “Bankers don’t have to meet that standard; their legal obligation is to act in their employer's best interest, which was even in their own words.”
White said banks often paid referrers almost as much upfront as they paid brokers, without clawbacks, BID, or accountability – “and that’s on top of a banker’s salary”. This was an issue that was front and centre in the Royal Commission.
“Despite brokers handling 75% of all new home loans, AFCA data [from FY23] has shown that complaints against brokers are nominal and represent just 0.3% of all complaints.
“Meanwhile, banks are lifting bonus caps back to 80%, despite the Royal Commission’s clear findings on how these incentives led to poor outcomes.”
White said it was not about capping pay – it was about who you were working for.
“Brokers are legally bound to put clients first. Banks are not. And that sums up the difference. Let’s keep raising the bar, putting clients first and delivering the best outcomes for Aussie homeowners, every time.”
Comyn defends CBA bonus pay decision
The economics committee questioned Comyn about CBA’s decision to lift the maximum bonus for its employees serving mortgage customers to 80%, above the above the 50% limit recommended by the independent Sedgwick retail banking remuneration review, and asked which employees to whom it would apply.
Comyn said it applied to proprietary mortgage lenders who served customers to meet their mortgage needs.
“We have considered this issue carefully over a significant period of time … if you’re a proprietary lender in the Commonwealth Bank, you have an extensive oversight and monitoring which applies to what we call a risk gate, which means if you fail you get nothing,” Comyn said.
He said there were other criteria, such as values and behaviours, and a scorecard which determined a bonus was equally weighted three ways – customer (NPS or advocacy); business outcomes (lending to customers) and key role activities.
“There are a number of controls to monitor that. We have lenders on a fixed pay – a small proportion would then qualify for an increase from 50% of their fixed pay to 80%.”
Comyn pointed out that CBA had 1,800 home lenders compared to approximately 20,000 mortgage brokers, who have very successfully grown to be “about 72%” of mortgage origination.
“There is no balanced scorecard, there is no fixed pay – they [brokers] are entirely remunerated based on the number of loans that they sell.
“I’m sure this has been extensively reviewed – there’s of course their own regulatory obligations and … best interests duty but we felt that we were putting ourselves at a significant competitive disadvantage – we thought it was unfair the remuneration practices that we were limiting our people to and we see it still as a much lower risk channel than the mortgage broking channel.”
The committee pointed out that ASIC had said the change on bonuses was disappointing and could result in poor outcomes for customers, while Macquarie Business School professor Elizabeth Sheedy had said the risk was that “people become short-term focused, and do dodgy stuff, like exploiting unsophisticated customers”.
Comyn said he understood the concerns and CBA had held extensive deliberations and engaged with regulators.
“We’ve got to make the best decisions in the interest of the Commonwealth Bank. We believe that these risks can be controlled. It simply cannot be that there’s an undue level concern about a few hundred lenders versus the 20,000 mortgage brokers that don’t have any of the controls we’re talking about.”
Brokers a higher risk – Peter King
King said the original Sedgwick recommendation was to have bonus caps across banks and mortgage brokers and this had not occurred – brokers didn’t have caps.
“We have been operating since the Royal Commission as banks at a different level of variable reward home finance rewards to brokers,” King said.
He acknowledged CBA’s bonus increase of up to 80% and Westpac would finalise its approach on bonuses for next year very soon “and that [lifting the cap] is a live consideration for us.”
“I can’t be in a position where my best mortgage lenders will go to another organisation, I’ve got to compete within the market.”
King said there was a lot of focus on the banks but they only wrote one in four mortgages, while brokers wrote three-quarters of all mortgages. He also mentioned Westpac had implemented responsible lending controls.
“If you’re worried about being an incentive issue in the market, it really should a standard that’s applied to the whole market … the systemic risk is higher in mortgage broking,” King said.
MFAA response
MFAA CEO Anja Pannek (pictured above, second from right) described the comments from major banks on broker commissions as “convenient opinions couched as facts”.
“I doubt anyone in the mortgage broking industry was surprised,” Pannek said. “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.”
Pannek said in contrast, the mortgage broking industry had not only proactively stepped into self-regulation in response to ASIC’s broker remuneration review in 2017, but further embraced and embedded subsequent regulatory changes.
“Mortgage broker remuneration is regulated under law, banker pay is not (or even under self-regulation apparently). There are checks and balances on broker conduct – through licences, aggregators and by the risk teams within lenders themselves.”
Pannek said absent from the commentary was the requirement for brokers to comply with the conflict priority rule.
“Nor was there any mention of commissions paid net of offset, or the banning of volume-based bonuses, soft dollar payments and other incentives.
“And where was mention of the self-regulatory regime that includes clawbacks or the legislative prohibition on brokers to pass clawbacks onto clients? All of these measures act as checks and balances on broker commissions.”
FBAA response
FBAA managing director Peter White (pictured below) said the big banks had learnt nothing from the Hayne royal commission and “hate competition”.
He said dragging brokers into the conversation was a “smokescreen to deflect from their own bad practices”.
“Both the Government and Opposition understand that broker remuneration is fair for brokers and consumers, and after endless reviews over many years the matter is settled,” White said.
“Everyone has moved on except the bank bosses who cannot stand that fact that brokers bring competition to the market.”
Calling the comments laughable, White said “they don’t even hide their greed anymore.
“The big banks want a monopoly and clearly the billions of dollars of profits they make every year isn’t enough. At the core of this matter is the desire by the banks to incentivise the risk of bad behaviour.”
White said these incentives could and did result in bank staff encouraging borrowers to refinance even if it was not in their best interests.
However, while mortgage brokers are legally obliged to act in the best interests of their customers, “banks are not, and they cannot because they are selling a product.”
White said that the royal commission was never about mortgage brokers who didn’t have the opportunity to defend their position.
“This was a royal commission into poor bank superannuation and financial services conduct, and how quickly the big banks have forgotten the stories of the countless people whose lives were ruined due to their conduct.”
It was irrelevant comparing brokers, who as small businesses had no regular pay or safety net, to bank staff.
“A mortgage broker may earn nothing one month and the next month may make money only to have the risk of a clawback,” White said. “If the banks care about their lending staff so much they should increase the base salaries.”
Sedgwick report
Pannek said it was also important to reminder lenders what was in the Sedgwick report.
The Australian Banking Association (ABA) commissioned Stephen Sedgwick AO in 2016 to undertake a large-scale review of remuneration practices for frontline retail banking staff.
“This review, delivered in 2017, recommended comprehensive reforms and outlined a three-year process for banks to implement the reforms,” Pannek said.
The ABA then commissioned Sedgwick in late 2020 to undertake an independent assessment of the scale and effectiveness of implementation of the reform program, with the CEO of the Australian Banking Association Anna Bligh noting when this report was finalised: “This final review by Stephen Sedgwick clearly demonstrates that banks have kept their promise to stop poor remuneration practices and put the customer first”.
Pannek said while Sedgewick’s interim report may have advocated for a lender paid fee-for-service model, his final report made no mention of it, instead focusing on other aspects of ASIC remuneration reform recommendations, all of which were implemented by the mortgage industry through self-regulation.
“As to the level of risk posed by loans written by brokers versus lenders – we can point to the extremely low AFCA complaints related to mortgage brokers, and the continued customer satisfaction that the industry brings, demonstrated by increased market share.”
Pannek said comparing broker commissions with the salary and bonuses of bankers was 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.
“And when it comes to ‘caps on commissions’ that’s akin to saying that a lender’s revenue should be capped, that the manufacturer of a product should be allowed to dictate the amount of revenue distributors of its products can make.”
Pannek said while there was some acknowledgment at the committee hearing about brokers acting in their clients’ best interest, there was no mention of lenders lacking the same duty to clients.
“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.
“Ultimately Australians have choice. And we know who they are choosing.”
What do you think of the big banks' views when it comes to broker pay? Share your comments below
