In its second submission to the Productivity Commission (PC), released on Wednesday (21 March), the Reserve Bank of Australia (RBA) has backed draft recommendations 8.1 and 8.2 of the PC’s draft report, which call for a duty of care obligation to be applied to lender-owned aggregators and for increased conflict of interest disclosure for brokers.
“Steps to address the underlying conflicts of interest and misaligned incentives are therefore crucial to improving consumer outcomes,” the central bank noted.
The RBA believes that duty of care obligations should not be limited to brokers operating under lender-owned aggregators, but should apply to all brokers.
“The bank supports the draft recommendation to require lender-owned aggregators and the brokers who operate through them to act in consumers’ best interests (draft recommendations 8.1 and 8.2). We would support extending this to all brokers.”
The Reserve Bank stated that increased broker disclosure would improve transparency, but emphasised the need for greater customer access to financial information.
While there may be some benefit in enhancing mortgage broker disclosure requirements to consumers to improve transparency, it is important to recognise that some consumers may nonetheless still not fully understand the information provided (given its complexity and the backdrop of consumers not taking out a mortgage frequently).
Further, the RBA cited findings from the Australian Securities and Investments Commission’s (ASIC) review of mortgage broker remuneration. The bank expressed support for ASIC’s determinations, including:
- Smaller lenders find it harder to get onto aggregator panels due to fixed costs.
- Brokers need to be accredited with a particular lender to sell their loans and they have incentives — partly due to variations in commissions and the burden of seeking accreditation — to concentrate their recommendations on a small number of lenders rather than the whole panel of potential lenders.
- Lenders may compete on their incentives to brokers, rather than on the quality of their loan products, creating competitive barriers for smaller lenders who find it too costly to offer such incentives.
- Higher commissions for brokers may also drive up costs for consumers.
Moreover, the central bank noted its support for enhancing customer access to mortgage pricing information, suggesting that the banks could publish such data directly or the “largest mortgage brokers” could be surveyed to “obtain representative rates”.
[Related: ANZ backs LMI refunding]