EY calls for broker commission reform

Financial services firm EY has recommended the introduction of a fee-for-service requirement to mitigate conflicted remuneration in mortgage broking.

The group also highlighted the need for greater consistency in regulatory standards between mortgage broking and financial planning.

In its second submission to the Financial System Inquiry, EY observed that disclosure rather than vertical integration is the main issue impacting the transparency of the third-party channel.

While the MFAA and FBAA Codes of Conduct, the NCCP, responsible lending and ‘not unsuitable’ provisions have improved practices and increased disclosure obligations for both brokers and lenders, such standards do not equate to the introduction of best interests tests, conflict priority rules, or conflicted remuneration provisions under FOFA, the submission said.

“Greater consistency in regulatory standards and conflicts management should be considered, particularly given the likelihood of convergence between mortgage broking and financial planning industries,” it said.

“This does not mean the same regulations need to apply to both industries – to the contrary – however, functional consistency regarding the removal of key conflicts should be a major objective.”

This could be achieved by improving disclosure arrangements, EY said, or ensuring greater consistency or realignment of pricing and remuneration structures, including upfront commissions, ongoing trails and volume bonus arrangements, it said.

“A fee-for-service requirement, whereby payments are made directly from the customer to the broker, as opposed from the product manufacturer, would largely mitigate this conflict.”

The submission noted recent comments made by APRA in its Draft Prudential Guide on Mortgage Lending that “experience has shown that commissions paid upfront tend to encourage less rigorous attention to loan application quality.”

Outsource Financial chief executive Tanya Sale believes ASIC is currently looking into broker disclosure and any potential conflicts of interest with brokers of bank-owned aggregators.

“It is all about disclosure,” Ms Sale told Mortgage Business.

“I honestly think ASIC should and will look at the disclosure documents of the bank-owned aggregators,” she said. “I think that will come.”

In its submission, EY said better disclosure could include providing more details regarding the volume of ‘owner’ mortgage products sold relative to other panel lenders and/or incentive arrangements between owners and aggregators.

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