Productivity Commission Recommendations August 3

August 7th, 2018

The Productivity Commission (PC) issued its final report on competition in the Australian Financial System last Friday, August 3. Of course, the media was quick to pick up on their recommendation to abolish trail commission in this report, and once again our industry has been subjected to a great deal of negativity.

From your perspective as a mortgage broker, the recommendations in the report will be extremely concerning. For example, the recommendation to abolish trail commissions could potentially threaten the commercial viability of your business.

It’s important to understand the role of the PC to put their recommendations into perspective. Below is a quick summary of what has transpired and Connective’s take on the report and the extent it impacts us and our industry.

How did we get here?

The PC is the Australian Government’s independent research and advisory body and reports on a range of economic, social and environmental issues.  The latest report, focusing generally on competition in the Australian financial system, devoted a chapter to the mortgage broking industry.

The PC circulated its draft report for public comment in February 2018.  You can read a summary of Connective’s submission in response to this report here.  In addition to our submission, we have worked tirelessly with the Combined Industry Forum (CIF) to educate the PC about our industry with the objective of changing some of their views.

What are the key recommendations in the latest PC report which impact our industry?

1. Ban payment of trail commissions for all loans that originate after 2018.

It is extremely disappointing that the PC have made this recommendation.  The PC acknowledged in the report that various reasons for trail commission were provided through public submissions.  However, the PC concluded that they did not believe there was any evidence to substantiate that trail commissions are a payment for the ongoing provision of services to borrowers.  If anything, they felt trail commissions align a broker’s interests with those of the lender.

Connective strongly disagrees with the PC’s position on trail commissions.  It is disappointing that the PC has formed a view regarding broker commissions from the outset and have refused to listen to industry explanations, steadfastly holding onto this incorrect opinion.  Connective will continue to argue strongly against this recommendation to the regulator (ASIC) and government (Treasury) as well as through any other available channels.  One side note to point out is that the PC did acknowledge that in conjunction with the removal of trail commission, up-front commissions may rise to ensure brokers remain commercially viable.

2. Require upfront commissions to be paid based on funds drawn net of offset and ban volume-based commissions, campaign-based commissions and volume-based payments.

These recommendations are already captured in the CIF’s proposed reforms and in some cases, such as with volume-based payments, have already implemented.

3. No support for consumer pay model.

One pleasing finding from the report is that any fee-for-service paid by consumers is unlikely to be pro-competitive and therefore, the PC does not recommend this as a viable commission structure.

4. Limit clawback periods to 2 years and prohibit a broker passing on clawback costs to customers.

In the report, the PC saw clawbacks as a disincentive to the broker. If passed on to the customer, they could also deter the customer from refinancing.  Accordingly, the PC recommended a prohibition on clawback periods greater than 24 months – which is already pretty much the industry standard.  The PC consider the passing on of clawback payments to the customer as the equivalent of an early exit fee, which is prohibited by the National Consumer Credit Protection Act (NCCP), and therefore believe passing on clawback payments to a customer should also be prohibited by law.

We are disappointed by the PC’s stance on clawbacks.  Connective contends that as part of their responsible lending obligations, a mortgage broker makes a great effort to ensure the home loan meets the customer’s needs and objectives – and they should be remunerated for their work regardless of the customer’s future actions.

We raised this in our submission, however the PC chose to disregard our argument and chose to see clawbacks from a lender’s perspective. In other words, they see clawbacks as a passing on to the broker of the upfront cost of originating a loan, and completely disregard the fact that it means a broker may not be remunerated for their work and the clawback is usually because of customer behaviour outside their control.

5. Best interest obligation for credit licensees that facilitate home loans.

The PC report recommends the NCCP be amended to incorporate a best interest obligation on licensees that provide credit or credit services in relation to home loans.  This would apply to brokers, but also to bank branch staff.  We have long argued against the imposition of a best interest obligation rule, primarily on the basis that it did not work in the financial adviser space, and that it would only create uncertainty by applying a standard which was not appropriate for our industry.   The CIF has already proposed the concept of “good customer outcome” as the appropriate standard for our industry.  Connective is supportive of the CIF’s position and will continue to publicly object to any attempt to apply a best interests duty.

For further information, please see my recent article published in the MPA here. 

Where to from here?

The PC’s report is nothing more than a recommendation to the Australian Government.  Although many of the PC’s comments are of concern to the industry, their recommendations will not become law unless the government chooses to legislate.

We believe the real direction of our industry and how it operates is in the Treasury’s submission to the Royal Commission dated 13 July 2018, which you can access here. The operation of our industry falls within the remit of the Department of Treasury, including the responsibility of our regulators (ASIC), our licensing regime and the key piece of legislation (NCCP).

Treasury’s submission included some more optimistic points:

• It recommends that the industry continue its effective action by regulators, rather than impose a further tightening of legal obligations (i.e. no need to change the existing law).

• The CIF proposals are positive developments which Treasury welcomes.

• It explored various alternative commission models but recognised that in light of CIF’s proposals and tighter lending standards, any change to the current model (which implicitly includes trail commissions) may lead to unintended consequences. It suggested considering flexible and less prescriptive approaches coupled with, once implemented, ASIC’s product intervention powers to target unfair remuneration structures.

• It supported the introduction of a positive duty for brokers to a certain extent, however queried whether this would be best achieved by replicating the financial advice best interest duty given the differences between the industries. Any duty would need to be considered further.

What will happen next?

The next major event will be the release of the Royal Commission’s draft report 30 September 2018, which will be released for public comment shortly after.  Our initial observations on the Royal Commission can be found here.

The final report is due February 2019.  Considering the media coverage and its political sensitivity (especially as we approach a Federal Election), it will be the Royal Commission’s recommendations that will impact us most.

We expect the Royal Commission will recognise the view of Treasury – the government body responsible for implementing any recommendations it makes – when preparing its final report. This should provide a more positive outcome for the industry.

Connective will continue to represent your interests throughout this process. If you have any questions, please don’t hesitate to get in touch – email daniel@connective.com.au