October 8th, 2018
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released its interim report on 28 September 2018. This interim report covers the first four rounds of hearings conducted by the Royal Commission, including its examination of mortgage brokers, home loans and consumer lending.
Commissioner Hayne’s interim report contained some disappointing, and in my view, misguided narrative. His remarks about the industry’s failings and misconduct being motivated entirely by “greed and remuneration driven behaviour” may not have been directed at mortgage brokers specifically – but were nevertheless unfair and misinformed from our viewpoint.
Commissioner Hayne has selectively used only parts of the submissions he received to draw his conclusions and prove his position regarding mortgage brokers. By taking this approach, he has overlooked other evidence that proves mortgage brokers bring considerable benefits to consumers and healthy competition to the home loan market.
Concerns and pain points
Naturally, our biggest concern is Commissioner Hayne’s commentary on broker remuneration.
As reasons for changing the current broker commission model, Hayne quotes data from ASIC’s Review on broker remuneration (the ASIC Remuneration Review) that home loans arranged by brokers were on average larger, had a higher LVR, incurred higher arrears rates and so forth. Disappointingly, he does not seek to understand the context of that data – for example, comparing the consumers that use the broker channel as opposed to going direct to a bank.
ASIC conducted their largest ever data gathering exercise in preparing the ASIC Remuneration Review. It is interesting to note that ASIC used this data to conclude that the current commission model was fine subject to refinement, whereas Commissioner Hayne believes it is evidence that the broker commission model needs to be changed.
Hayne also seems to have ignored Treasury’s commentary on this data in their submission to the Royal Commission, which said:
“…these average differences are prima facie and not so significant that they provide compelling evidence of major problems that require a wholesale change to the existing standard commission structure, given the industry reforms currently underway …”
The Combined Industry Forum (of which Connective is an active member), is already responding and working on the areas that have been identified as needing refinement. Considering this positive action, Hayne’s observations regarding mortgage broker remuneration are very disappointing indeed.
What will happen next?
We expect Commissioner Hayne will continue his narrative that the misconduct displayed in the case studies he has reviewed during the Royal Commission have all been motivated by greed – the pursuit of short term profit at the expense of basic standards of honesty. However, we are hopeful that the submissions of Connective and others in the industry, including the MFAA, FBAA and Combined Industry Forum, will help convince Commissioner Hayne that although there may be potential conflicts from value-based remuneration structures, the industry is already focused on improving through self-regulation.
Based on their observations of the industry and the additional improvements recommended by the Combined Industry Forum, neither Treasury nor ASIC have advocated for wholesale change to the remuneration structure mortgage brokers. Ultimately, the current structure works better than any of the available alternatives.
From our perspective, we believe that the current laws are adequate for the time being, and implementing the Combined Industry Forum’s recommendations and increasing the supervision of broker activity by lenders and aggregators should suffice. As suggested by ASIC in the ASIC Remuneration Review, I believe a wise course of action would be for ASIC to re-examine the market data in a couple of years to assess the impact of the Combined Industry Forum’s recommendations. This should be a necessary step before making any significant changes to laws, including those which govern how mortgage brokers are remunerated.
Read my full submission, coming soon.
Connective will continue to deal with the Royal Commission and will be submitting a response to the latest report shortly. We’ll let you know when that’s available for review. Watch your inbox for an invitation to a webinar where we’ll discuss the latest report more fully and address any concerns you may have. We will also work with Treasury, ASIC, the industry bodies and the Combined Industry Forum to lead a transition that protects the best interests of both consumers and brokers.
In the meantime, if you have any pressing concerns or want to provide me with your feedback for my submission to the Royal Commission, just let me know. Email me at email@example.com and I’ll respond asap. Alternatively, have a chat with your local Compliance Support Manager today.