The major banks have had their turn in front of the PC to discuss broker remuneration. Their feedback could have a big impact on the industry's future
The major banks have had their turn in front of the Productivity Commission to discuss broker remuneration. Their feedback could have a big impact on the industry's future. From MPA magazine issue 18.03.
The Productivity Commission is taking a hard look at how brokers are remunerated, whether they serve their clients’ best interests, and what conflicts may exist as a result of working for bank-owned aggregators.
Two of the big four banks, CBA and NAB, addressed the Productivity Commission in Sydney on 1 March to discuss these matters, with NAB agreeing that trail commission could be further scrutinised and CBA saying the ‘best interest’ duty could be a positive move.
The Productivity Commission’s draft report raised concerns about lenders’ ownership of aggregators potentially exacerbating conflicts of interest for brokers and giving consumers “an illusion of choice”. The commission recommended that brokers who work under bank-owned aggregators – even if they operate as independent subsidiaries – should have a legal responsibility to act in their clients’ best interests.
As it stands now, nothing obliges brokers to act in a client’s best interests. Under the NCCP Act, brokers are only required to not suggest unsuitable loans to consumers, the report said.
“Undesirably for the dominant form of home loan origination, the financial incentives of brokers are skewed in favour of the banks that pay them,” it stated.
“The best interest duty that you outlined, we’d see that as a positive development if it were applied consistently across the industry” - Angus Sullivan, CBA
In CBA’s opening remarks, chief financial officer Rob Jesudason said the bank objected to the recommendation only being applied to aggregators owned by lenders. “We support equal treatment," he said.
Angus Sullivan, CBA’s executive general manager of retail sales and service, explained the bank’s ownership of Aussie, saying it ran the franchise “quite independently of CBA”. He said this ownership was clearly disclosed on the Aussie website. But he did accept the commission’s charge “that there’s the potential for the perception of a conflict of interest."
“We’re supporters of growing the standards of the industry as a whole and, for the broker segment in particular, the best interest duty that you outlined, we’d see that as a positive development if it were applied consistently across the industry,” Sullivan said.
He said it would be “peculiar” for consumers to expect and be assured of the ‘best interest’ standard with one set of brokers and not another. “I think that would be highly counter-intuitive to your average consumer.”
If this change were to come into effect, NAB would be one of the main targets as the owner of three major aggregators, PLAN, Choice and FAST.
When asked about this at the public hearing, NAB’s chief operating officer, Antony Cahill, said one of the issues around ‘best interest’ was defining it.
“How would you actually validate what constitutes best interest? Is it price, is it other factors, and how would you work that through?” Cahill said.
“I think the idea of requiring brokers to put customers’ interests first is appropriate, and I think the vast majority of brokers within Australia would absolutely argue they do put their customers first.”
At a later public hearing in Melbourne, ANZ CEO Shayne Elliott said that while ANZ didn’t own a broker network, it did “believe the integrity of the channel is critical”.
He said the best interest duty could support the existing law to promote consumer interests, but he urged the commission to take three matters into account: the need for trust in brokers as advisers; whether consumers will pay for loan help; and brokers’ role in levelling the playing field for banks without branches.
Taking on trail
Productivity Commission chairman Peter Harris said it shouldn’t come as a surprise that attention was being paid to how brokers were remunerated, considering that more than $2.4bn was currently paid annually for mortgage broker services, with trail commission worth $1bn per annum.
The commission did not make a recommendation on trail in its draft but said it was considering this for its final report to the government. It is now seeking feedback on the “rationale for how commissions are structured”.
The industry argues that trail is in place for good reason: to prevent churn. But the commission countered that this could discourage refinancing if the work involved in getting a marginally better rate for the customer exceeded the benefit for the broker.
“[Trail] creates perverse incentives for mortgage brokers by rewarding them for keeping customers in their existing loan” and skews their loyalty towards the institution and not the customer, the commission said.
Based on ASIC’s findings, lenders pay brokers an upfront commission of $2,289 (0.62%) and trail commission of $665 (0.18%) per year on an average new home loan of $369,000.
At the public hearing, Harris questioned why trail still existed in Australia when that was not the case for most brokers abroad. “Overseas we know that, where brokers do exist, this particular proposition [trail] doesn’t. … It doesn’t suggest that the world will collapse if this proposition isn’t there, and the question is, what incentive structures would be preferable?”
According to a research paper on commission conducted by the FBAA last year, most other countries with broking markets similar to Australia’s don’t have trail commission, but generally the upfront is worth more as a result. The estimated average upfront commission in Canada is 1%; in South Africa it’s 1.4% and in the US 2–3%.
Commissioner Stephen King also said the argument that trail was necessary for the ongoing engagement and servicing of a client didn’t make “a great deal of logical sense” because the broker was guaranteed this payment whether they did anything or not.
NAB’s Cahill said the bank expected its brokers to cultivate an ongoing relationship with customers as part of their work for earning trail, but he acknowledged that there could be better ways of ensuring this was done appropriately.
“Personally, I would be happy to see a more structured agreement requirement put in place,” he said. “I think how that would play out and how it would be structured, implemented and tested, that’s the area I’d like to have a greater understanding of.”
But Cahill was also quick to point out the importance of brokers to the competitive home loan landscape.
“Brokers in Australia, they are a force of good.”
