There are sensitive, but critical questions to be asked at this point in time regarding the viability of the current remuneration structure for mortgage brokers.
Make no mistake this is a thorny issue and one that provokes passionate responses in opposing camps. But as the last bastion of trail commissions for its brokers, Australia is now under the spotlight, and there is growing pressure from some quarters to move away from commissions altogether.
Could this really happen? What would the alternative be? How would brokers be remunerated if commissions were abolished, like they were for financial planning?
With the Murray Inquiry scrutinising the financial system and FOFA dominating headlines, the ways in which financial services professionals are paid is under the microscope.
The latest to weigh into the debate, financial services firm EY has recommended the introduction of a fee-for-service requirement to mitigate what it cites as conflicted remuneration in mortgage broking. This could be achieved by improving disclosure arrangements, EY says, or ensuring greater consistency or realignment of pricing and remuneration structures, including upfront commissions, ongoing trails and volume bonus arrangements.
“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.
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.
But while there is a growing chorus from outside the industry for revising commission payments, support for the current structure from the lenders has never been greater.
In June, NAB reintroduced its first-year trail reinforcing its commitment to the third-party channel remuneration framework. NAB general manager of broker distribution Steve Kane said it was recognition of the work that brokers do in managing that customer beyond just the initial transaction.
“Part of the legislative piece around NCCP responsible lending was really that brokers and anyone providing credit needs to ensure they are looking beyond the initial transaction,” Mr Kane said.
“So it was recognition of the role that brokers will play in managing the relationship and it’s also recognition, of course, in the value they create for the bank.”
And there’s the handle – the value brokers create for the bank.
Unfortunately, financial planners also create value for the banks and were rewarded with commissions (we all know how that ended).
FOFA has certainly completely turned the whole financial advice industry on its head, CBA head of mortgages Clive van Horen says.
“Our biggest difference with the mortgage industry, particularly the broking industry, is genuinely trying to get a better deal for customers amongst competitive providers,” Mr van Horen said.
Others have been less diplomatic.
One industry leader, who wished to remain anonymous, said that we are heading towards a “FOFA moment” in broking “without a doubt”, driven by incentivised commission structures among bank-owned aggregators.
Vow chief executive Tim Brown recently raised the issue in an opinion piece for The Adviser, stating that trail – while being one of the “greatest benefits” of being a broker – is also one of its greatest threats.
“You don’t have to look far to see how quickly the market can change,” Mr Brown said, pointing to the post-GFC removal of trail commissions in New Zealand.
“These decisions were made by the same banks that control the Australian market,” he said.
“You only have to look at the changes to the financial planning industry to know that it is inevitable the government will intervene regarding the way credit advisers are remunerated.”
Smart brokers shouldn’t have to be told this. Smarter brokers will already be putting the actions in place in the event that commissions could end.
If brokers want to avoid a FOFA-style intervention then disclosure is the first line of defence.
Mr van Horen foresees greater obligations on lenders and brokers to disclose commission arrangements and incentives.
“I think it is only right that customers know what the financial incentives are for their brokers to do business with them,” Mr Van Horen said.
“You have more integration across financial advice and mortgage advice today, so many broking groups or branded groups are explicitly providing customers with that integrated offering,” he said.
“It is quite hard to have two different sets of standards with disclosure or commission arrangements.”
Connective principal Mark Haron says the vertical integration of mortgage broking has led some loan writers down a dangerous path that could raise the red flag.
Mr Haron says it is a well-known fact that some aggregators provide additional incentives to their brokers to sell particular products.
“That will be done not necessarily through cash bonuses or commissions from the particular funder, but more form the aggregator reducing or refunding aggregation fees based on the sale of those products,” he says.
“That type of behaviour can be done, but it is up to the broker sitting opposite the customer to disclose that conflict of interest.”
Mr Haron believes the biggest challenge for broking is around conflict of interest, mostly driven through bonuses and varied commission structures.
“If brokers don’t disclose it effectively and people feel that they have been sold a product because a broker was biased because of a bonus or some special arrangement, then as an industry we are seen to be less reliable, and potentially down the track we could have consumer groups and the regulator saying they can’t trust brokers with commissions because they don’t disclose them effectively, and we could end up going down a similar path as the financial planning industry with FOFA,” he said.
“The regulators are certainly looking at the vertical integration structures that exist within the financial planning community and how that affected product sales, and there is certainly some issues around that for mortgage broking.”
In the much anticipated Murray Inquiry Interim Report, vertical integration in mortgage broking was highlighted as a potential issue – taking the seriousness of the commission's debate from the water cooler to a national inquiry.