Published 11 February 2019
Following is a summary of the Royal Commission’s final report recommendations tabled in Parliament on Monday, 4 February 2019.
Whilst you are aware that the MFAA does not agree with the recommendations, it is important to maintain a full and thorough understanding of the final report to inform purposeful discussion going forward, particularly given the fact that there are many Australians – including people of significant influence – who do not understand our industry nor the implications of these recommendations.
If you would like to review the full Government response to the Report, you can download a PDF here.
We will continue to engage with the Federal Government, Opposition and other key stakeholders as they further consider these recommendations and will continue to strongly advocate against changes that could severely challenge the viability of our industry, reducing competition, choice and access to credit whilst making it substantially more expensive for all Australians to get a home loan.
A. Key recommendations at a glance:
|Trail commission (1.3)||Lenders to be prohibited from paying trail within 12 to 18 months. Existing trail would stand unaffected|
|Upfront commission (1.3)||Recommends the removal of upfront commissions over a period of a further 12 to 18 months (so 2 to 3 years time)|
|Best interest duty (1.2)||Best interest duty required. Breach will be subject to a civil penalty (i.e. it’s a legal duty)|
|Working Group (1.4)||A Treasury-led working group should be established to monitor and, if necessary, adjust the (broker) remuneration model to achieve a level playing field, in response to market changes|
|Mortgage Brokers as financial advisers (1.5)||In time, mortgage brokers should be subject to and regulated by the law that applies to financial advisers|
|Misconduct (1.6)||Improved information-sharing and reporting obligations on ACLs relating to misconduct of mortgage brokers|
|No extension of NCCP to SMEs (1.9)||The NCCP Act should not be amended to extend its operation to lending to small businesses|
B. Further detail on key recommendations:
The Commissioner’s recommendations, Government’s response and any applicable MFAA comments relating to residential mortgages are as follows:
1. Trail Commission
Recommendation 1.3 – “The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending”. Recommended that lenders be prohibited from paying trail within 12 to 18 months.
- Existing trail would stand unaffected.
- Problems arising from unnecessary ‘switching’ or ‘churning’ of home loans are more effectively addressed by providing for ‘clawback’ of commissions or fees.
- If commission payments were to remain, [the Commissioner] would support the recommendation made by the Productivity Commission to prohibit commission clawbacks from being passed on to borrowers.
- Government Response – Prohibition of trail commissions on new loans to come into effect from 1 July 2020.
MFAA note –
- It is unclear at this stage how and whether this impacts on all residential lending including, for example, loan refinancing, top ups, switching, dealings with mortgage managers, etc.
- The MFAA and CIF have supported continued payment of trail as a positive control mechanism to maintain good customer outcomes through (lender) withholding where a loan is in arrears; is refinanced or involves fraud.
- We note that this recommendation is at odds with commentary from both ASIC and Treasury but is consistent with the final recommendations of the Productivity Commission.
2. Upfront Commission
Recommendation 1.3 – “The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending”. Recommends the removal of upfront commissions over a period of a further 12 to 18 months (i.e. 12 to 18 months after trail has been abolished on new loans).
- The Commissioner has stated that value-based commissions are a form of conflicted remuneration that can reasonably be expected to influence the choice of mortgage, the amount to be borrowed and the terms on which the amount is borrowed.
- “As I said in the interim report, the CIF reforms announced are limited”.
- “While basing those commissions on funds drawn down will remove an incentive for brokers procuring a loan larger than the borrower will use, the change will not deal with the more basic problem of borrowers being encouraged to borrow more than they need.”
- “It may be that to create a level playing field between banks and brokers, banks should be required to charge a fee to direct customers based on the costs that are incurred by the bank when there is no broker.”
- How the fee (customer fee) is fixed is best left to the market to determine. It could be a fixed amount, a stepped fee, a value-based fee or some combination. This is a matter that should be considered by the Treasury-led working group.
- Both the fee charged by the broker or the bank should be able to be capitalised into the loan.
Government Response – The value of upfront commissions to be linked to the amount drawn-down by borrowers and not the loan amount from 1 July 2020.
- From that date, the Government will also require that the value of upfront commissions be linked to the amount drawn‑down by borrowers and not the loan amount, and the banning of campaign and volume‑based commissions payments (note these have already been implemented by the CIF). The Government will additionally limit to two years the period over which commissions can be clawed back from aggregators and brokers and prohibit the cost of clawbacks being passed on to consumers.
- The Government will also ask the Council of Financial Regulators, along with the Australian Competition and Consumer Commission (ACCC), to review in three years’ time the impact of the above changes and implications for consumer outcomes and competition of moving to a borrower pays remuneration structure for mortgage broking, as recommended by the Royal Commission, and any associated changes that should be made to non‑broker facilitated loans.
- This also responds to recommendations of the Productivity Commission’s report Competition in the Australian Financial System dealing with the remuneration of mortgage brokers.
MFAA note –
- Whilst differing with the Government’s stance on trail (as covered earlier), the MFAA has welcomed the Government’s more measured and realistic response to the Commissioner’s recommendations.
- The Commissioner is effectively recommending a consumer fee-for-service or a consumer fee-for-service similar to the Netherlands model intended to create a level playing field.
- The MFAA notes that the Commissioner’s recommendations regarding upfront largely ignore and are at odds with previous reports and reviews by the Productivity Commission, the ABA Sedgwick Review, the data-driven ASIC Remuneration Review and the Treasury submission made to the Royal Commission (particularly paragraphs 12, 97, 105, 107, 108, 110 and 115).
- A consumer fee-for-service recommendation ignores research conducted in recent years (and most recently by Momentum Intelligence) that customers are unwilling to pay a broker directly and also ignores the warnings of the Productivity Commission Final Report which states “Fixed fees paid by customers rather than commission structures have been proposed, and would eliminate conflicts, but the cost to competition would be high. Consumers would desert brokers, and smaller lenders (and regional communities with few or no bank branches) would suffer much more than larger lenders, if customers were required to pay for broker advice.” 
The Commissioner’s recommendation with regards to the Netherlands model (which requires branches to also charge a fee to create a level playing field for brokers) has the following shortcomings:
- Firstly, the report says that “it may well be that lenders dealing directly with borrowers should be required to charge a fee”. This is in order to “prevent lenders competing unfairly with brokers”. The channel neutrality is therefore not a certainty and it may be that lenders will be able to undercut the broker channel. It is also not clear as to whether this charge applies to all lenders regardless of whether or not they have a branch network - with online lenders being an example.
- In the Netherlands, the customer’s capacity to pay the fee to either the broker or the bank is strongly aided by all mortgage related costs being tax deductible (including interest, all loan establishment costs and the cost of taking advice) whereas no such deductibility exists or is likely to exist in Australia for owner-occupiers and the costs will simply add to the affordability problem.
- The Commissioner has recommended that banks should “charge no more than the additional cost to the bank of making a loan to the borrower through its proprietary lending channel”. For many lenders this will not only undercut a broker’s cost but will certainly undercut the broker’s charge.
- In order for there to be a level playing field, the banks would have to charge the same as the broker channel charges and not their marginal cost which is likely to be an amount that is not only less than, or equal to, the brokers cost of arranging a loan but almost certainly less than the broker’s charge to customers.
- The Commissioner’s comments on CIF reforms ignore the “net of offset” component of the CIF reform which removes any incentive to arrange a larger loan than a customer will either use or need. They also ignore the extensive reforms on non-monetary benefits, ownership disclosure and the work currently being undertaken on public reporting, governance and the development of an industry code.
- CIF reforms were intentionally “targeted” to ensure they did not reduce competition and choice nor restrict access to credit.
- The CIF has already removed campaign and volume bonuses.
- The MFAA notes that capitalising new multi-thousand-dollar fees to be charged to a customer has the effect of almost doubling them over 30 years and that ignores any further fees paid upon refinancing or amending the loan over its life.
3. Best Interests Duty
- Recommendation 1.2 – The law should be amended to require a best interest duty and a breach will be subject to a civil penalty.
- Government Response – Government supports this. The duty will not change responsible lending obligations for broker-originated loans. The Government agrees, “following the implementation of the best interests duty, to further align the regulatory frameworks for mortgage brokers and financial advisers.”
- MFAA note – The Association supports a higher legal duty such as the customer first duty being implemented by the CIF. The MFAA would also be supportive of a Best Interests Duty but stresses the importance of ensuring that the definition of such a duty takes into account the differences between the mortgage broking and financial planning industry to ensure it is fit for purpose for our industry. Further advocacy and discussion are expected to reach an appropriate resolution.
4. Working Group
Recommendation 1.4 – A Treasury-led working group should be established to monitor and, if necessary, adjust the (broker) remuneration model to achieve a level playing field, in response to market changes.
The working group should pay particular attention to:
- The effect of the changes on interest rates
- The effect of the changes on competition between lenders
- The effect of the changes on competition between lenders and brokers; and
- Developments in the residential mortgage market that mean that the changes proposed should be re-evaluated.
- The working group should pay particular attention to:
- Government Response – The Council of Financial Regulators, along with the Australian Competition and Consumer Commission (ACCC) will form a Treasury-led group to coordinate a review in three years’ time on the impact of changes and implications for consumer outcomes and competition of moving to a borrower-pays remuneration structure for mortgage broking, as recommended, and any associated changes that should be made to non-broker facilitated lending.
- MFAA note – The Association supports the recommendation to form a Treasury-led working group but on the basis that no significant changes are made prior to the working group completing its work and having the opportunity to fully consult with industry whilst noting that the MFAA is opposed to recommendation 1.3. The MFAA would similarly be pleased to engage with a Treasury-led group “in three years’ time” to assess the impact of changes made and the possibility of further required changes as outlined in the Government’s response to the Royal Commission.
5. Mortgage brokers as financial advisers
- Recommendation 1.5 – After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
- Government Response – The Government agrees, following the implementation of the best interests duty, to further align the regulatory frameworks for mortgage brokers and financial advisers.
- MFAA note – The MFAA notes Treasury commentary that states that not all intermediaries are the same and that mortgage brokers have a narrower relationship with their customer than do financial advisers and any recommendation to move to align the regulation of these intermediaries should take these differences into account.
Recommendation 1.6 – ACL holders should be bound by information-sharing and reporting obligations similar to those for financial advisers and take the same steps in response to detecting misconduct of a mortgage broker as those for financial advisers.
- When a lender or aggregator detects that a broker has engaged in misconduct in respect of a particular loan, it should always take steps to assess whether the broker may have acted poorly in respect of other loans.
- Lenders and aggregators discovering misconduct by a broker [should] make whatever inquiries are reasonably necessary to determine the nature and full extent of the broker’s conduct. .
- Government Response – Government will require all AFSL/ACL holders to make all inquiries reasonably necessary to determine the nature and full extent of an adviser’s misconduct (when the licensee detects misconduct) and inform and remediate affected clients promptly. It is essential that where misconduct is identified, the perpetrators of such misconduct are disciplined and prevented from simply avoiding consequences by moving from one licensee to another.
- MFAA note – The MFAA supports better enforcement and better reporting of misconduct. The CIF is implementing a governance framework that will use Key Risk Indicators and unique identifiers to proactively monitor customer outcomes and broker behaviour and a mortgage broking industry code is being developed to enforce the CIF reforms and address poor behaviours.
7. Other recommendations
Reporting compliance concerns
- Recommendation – All AFSL and ACL holders will be required to report ‘serious compliance concerns’ about individual advisers to ASIC each quarter.
- Government response – Will mandate a quarterly reporting requirement.
Point of sale exemption
- Recommendation – Exemption of retail dealers from compliance with the NCCP Act to be abolished.
- Government response – Recognises that this change may impact on many businesses and will carefully consider how these reforms are implemented to ensure balance is achieved between consumer protection and access to products and services.
- MFAA note – The MFAA welcomes this recommendation provided that balanced implementation occurs.
- Recommendation 1.9 – The NCCP Act should not be amended to extend its operation to lending to small businesses.
- Government response – The Government agrees to this recommendation and the Commissioner’s findings that extending the responsible lending obligations in the NCCP Act would likely increase the cost of credit for small business and reduce the availability of credit. The Government is committed to ensuring access to affordable credit for small businesses.
- MFAA note – The MFAA supports this position and believes that remuneration in respect of SME lending should remain unchanged.
- Recommendation – Recommendations of ASIC’s Enforcement Review Taskforce on self-reporting of contraventions to be put into effect.
- Government response – The Government agrees to implement the outstanding ASIC Review recommendations to improve the breach reporting regime and provide ASIC with powers to give directions to AFSL and ACL holders consistent with the recommendations of the Review.
 Royal Commission, Final Report, 1 February 2019, p. 76-77.
 Royal Commission, p. 71.
 The Treasury, Restoring trust in Australia’s financial system, 4 February 2019, pp. 3 and 7. (Hereafter: ‘Treasury’. The Government’s response to the Royal Commission Final Report).
 Ibid, p. 77.
 Ibid, p. 67.
 Ibid, p. 68.
 Ibid, pp. 68-69.
 Ibid, p. 79.
 Treasury, p. 7.
 See The Treasury, Background Paper 24, Submission on Key Policy Issues, 13 July 2018.
 Momentum Intelligence, Consumer access to mortgages report, January 2019.
 Productivity Commission, Competition in the Australian Financial System: Inquiry Report Overview & Recommendations, No. 89, 29 June 2018, p. 22.
 Royal Commission, p. 77.
 Ibid, p. 80.
 Royal Commission, pp. 69 and 72-73.
 Treasury, pp. 3 and 7.
 Royal Commission, p. 79-80.
 Treasury, p. 7.
 Royal Commission, p. 80-82.
 Treasury, p. 6.
 The Treasury, Background Paper 24, 160, p. 40.
 Royal Commission, p. 82.
 Ibid, p. 81.
 Ibid, p. 82.
 Treasury, p. 8.
 Combined Industry Forum, Improving Customer Outcomes: The Combined Industry Forum response to ASIC Report 516: Review of mortgage broker remuneration, November 2017, pp. 19-22.
 Royal Commission, p. 82.
 Treasury, p. 8.
 Royal Commission, p. 84-88.
 Treasury, p. 8.
 Royal Commission, pp. 94-96.
 Treasury, p. 9.
 Royal Commission, see pp. 488-489.
 Treasury, p.37.