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CBA EGM of home buying Daniel Huggins was the first witness to appear before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry on Thursday (15 March), where he faced a barrage of questions about the group’s relationship with mortgage brokers.
During the inquiry, counsel assisting Rowena Orr, QC, read a submission letter from CBA chief executive Ian Narev to Stephen Sedgwick, the independent reviewer for a review into retail banking remuneration. Dated 10 February 2017 and described by CBA’s Mr Huggins as “a confidential submission”, the letter reads:
“We agree with the reviewer’s observations that while brokers provide a service that many potential mortgagees value, the use of loan size linked with upfront and trailing commissions to third parties can potentially lead to poor customer outcomes. Mortgages also sit outside the financial advice framework, even though buying a home and taking out a mortgage is one of the most important financial decisions an Australian consumer will make. We would support elevated controls and measures on incentives related to mortgages that are consistent with their importance and the nature of the guidance that is provided. For example, the de-linking of incentives from the value of the loan across the industry and the potential extension of regulations such as Future of Financial Advice to mortgages in retail banking.”
However, when asked to confirm that this is CBA’s position, Mr Huggins appeared hesitant, and he was asked by Commissioner Hayne if there was any hesitation about Mr Narev’s comments being the bank’s position.
“This has been CBA’s position,” Mr Huggins said. “I think the way in which you would achieve this obviously needs consideration. That’s why there is a hesitation. Moving to this, for example, de-linking of incentives, [factors] need to be considered about how you would achieve that. There are a range of things to consider.”
Ms Orr cited a CBA document annexed to Mr Narev’s letter which outlined that broker loans are “reliably associated with higher leverage” and have a “higher incidence of interest-only repayments”.
The paper also noted that broker loans have “higher total debt-to-income levels, higher LVRs and higher incurred interest costs” compared to proprietary.
The paper argued that volume-based commission be discontinued for third parties.
Ms Orr added that CBA has known these things since February 2017 but has not stopped paying volume-based commissions to brokers. Mr Huggins confirmed that this is correct.
Ms Orr then asked Mr Huggins if CBA had taken any steps to cease its practice of paying volume-based commissions to brokers.
“No, we haven’t,” Mr Huggins said.
The CBA executive also confirmed that incentives for aggregators have not been “de-linked” from the value of the loan in the way Mr Narev outlined in his letter to Mr Sedgwick.
CBA reducing broker flow
Earlier in the hearing, the commission heard that 41 per cent of CBA’s mortgage portfolio was originated by brokers as at 31 December 2017.
Mr Huggins highlighted that the flow — the new business being written by brokers — has reduced to 36 per cent in the first half of this year.
“The flow has been reducing over the last couple of years as a proportion,” Mr Huggins said. “We have been writing a lower proportion through our third-party network and slightly more through our proprietary channels.”
Ms Orr asked if it was CBA’s objective to decrease the proportion of loans coming through the broker channel and increase its proportion coming through its proprietary channel.
“We certainly have an objective to increase the proportion of loans coming through our proprietary channels, but I still want to sustain a strong broking channel,” the executive explained. “If I could hold the current level of sales in my broking channel and then grow my proprietary channel, that would be the objective.”