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When asked by counsel assisting the financial services royal commission Rowena Orr QC about his view on broker remuneration, ANZ CEO Shayne Elliott said that a flat fee paid by lenders is a “credible alternative” to the current commission-based model.
In a witness statement provided to the commission, Mr Elliott said that there’s “merit in considering alternative models for broker remuneration to ensure that the current model remains appropriate and better than any alternative”.
Reflecting on his witness statement, Ms Orr asked: “Is that because you accept that there’s an inherent risk that incentives might cause brokers to behave in ways that lead to poor customer outcomes?”
The ANZ CEO replied: “There is always that risk. [The] term incentive is to incent behaviour. Therefore, it can be misused or it can cause unintended outcomes if the broker is apt to be led by their own financial reward.”
Mr Elliott acknowledged that “no system’s perfect” and that a “fixed fee is also capable of being misused and leading to unintended outcomes”.
However, he added: “It is just my observation that there is at least some data on this from other markets, most notably in northern Europe. It seems a model that’s worth looking at.”
Mr Elliott continued: “I'm not suggesting it’s necessarily an improvement. It just feels like a credible alternative.”
The ANZ CEO compared a flat-fee model in the broking industry to the financial planning industry.
“The service is the work you are paying for, and perhaps the fee should not necessarily be tied to the outcome.
“I think that’s not an unreasonable proposition.”
However, the ANZ chief noted the negative implications of a flat-fee model, stating that with lenders ultimately passing on costs to consumers, the model would be a “major advantage” to higher income borrowers.
“The difficulty with the fixed fee, if I may, is it essentially is of major advantage to people who can afford and have the financial position to undertake large mortgages,” he said.
“[A] subsidy would be paid by those least able to afford it, and it runs the risk of making broking a privilege for the wealthy.”
There’s ‘merit’ in a fees-for-service model
Ms Orr also asked Mr Elliott for his view regarding a consumer-pays or “fees-for-service” model.
The QC asked whether such a model would address some of the concerns expressed by Mr Elliott about a flat-fee model.
Mr Elliott said that if a fee is paid by borrowers, it would be “uneconomic” for people seeking a loan to visit a broker, repeating that using a broker would become a “service for the wealthy”.
Ms Orr then asked the CEO for his thoughts on a Netherlands-style fees-for-service model, supported by Commonwealth Bank CEO Matt Comyn, in which both branches and brokers would charge a fee for loan origination.
Mr Elliott replied: “There’s merit in looking at that, [but] it still is an imposition of cost that would otherwise not have been there.”
Mr Elliott added that there would be “new costs” associated with a Netherlands-style model, noting that borrowers seeking a “top-up” for an existing loan would need to pay an additional fee.
In response, Ms Orr alleged that under the current commission-based model, costs are also “filtered back down” to consumers.
To which Mr Elliott replied: “In general terms, yes. Not necessarily in direct terms like that fee I charge you as a borrower [and] at ANZ, we have, for some time, disclosed [commissions]. So, when you do get a mortgage through a broker, we do advise the customer what we have paid that broker. So, it is disclosed to them.”
The ANZ CEO also said that under a fees-for-service model, consumers could be incentivised to take out larger loans to avoid paying a fee if they wish to top-up their loan.
Conversely, Mr Elliott added that if a flat fee is paid by lenders, some brokers may be incentivised to encourage clients to borrow less and “come back for more top-ups so that they get more fees”.
Mr Elliott reported that top-ups on existing loans make up 30 per cent ($17 billion) of total volume settled by ANZ.
The ANZ chief also told Ms Orr that he doesn’t believe a move to introduce an alternative remuneration model would be “hugely successful” without regulatory intervention.
The seventh and final round of the financial services royal commission’s public hearings continues and will conclude on Friday, 30 November.
The royal commission’s final report is set to be released in February 2019.