The Combined Industry Forum (CIF) has reported on a significant package of reforms as the mortgage broking industry works on solutions to issues raised in the Australian Securities & Investment Commission’s (ASIC) Review of Mortgage Broker Remuneration and the Australian Bankers’ Association (ABA) Retail Banking Remuneration Review (Sedgwick Review).
The package delivers a range of proposals – including some reforms already underway – designed to improve customer outcomes and preserve competition, anchored by a new governance framework that will raise standards of conduct, culture and accountability, and ensure continuous improvement. The report acknowledges the potential conflicts outlined in ASIC’s Review and addresses each specifically.
MFAA CEO Mike Felton said that these reforms are clearly about improved consumer outcomes, better disclosure and a significantly enhanced governance framework, but they are also about preserving what brokers bring to the market.
“Australia’s 17,000 brokers bring enormous value to the mortgage market through competition and providing access to credit. We seek to preserve that value by continuing to build the trust of consumers and all our stakeholders, while ensuring brokers are also fairly rewarded for the economic value they produce,” Mr Felton said.
“These are necessary reforms. At a time when scrutiny of our industry has never been higher, the time to re-prosecute these issues has passed. We must address the issues raised by ASIC and self-regulate effectively, or our industry will face negative consequences, both in reputation and in regulation,” he said.
In the report, the CIF has clearly defined ‘Good Consumer Outcomes’, and proposed specific reforms for each of the six key issues raised by ASIC and the ABA.
These reforms include avoiding financial incentives that may encourage consumers to borrow more than they need (or will use) and discouraging large initial offset balances, the expected ceasing of volume-based bonus commissions, campaign-based commissions and volume-based bonus payments paid by lenders, and better control and disclosure of non-monetary benefits.
The report also proposes implementation of a significantly improved data-driven governance framework that is self-assessing, self-correcting and continuously improving, enhanced disclosure, a transparent reporting regime, and further, an industry-based code that enables enforcement by ASIC.
MFAA CEO Mike Felton said the process confirms the industry’s ongoing commitment to positive consumer outcomes and demonstrates that it can effectively self-regulate.
“This is not lip service – we have acknowledged the potential for real conflict, and moved quickly to address this with real solutions and a focus on significantly enhanced governance, transparency and disclosure for customers,” Mr Felton said.
“I have faith that the industry will continue to drive trust and confidence in brokers for our long-term sustainability. The data for the September 2017 quarter show that brokers now have more than 55 percent market share. This growth reflects the value consumers see in using a broker, but we must take advantage of the profound opportunity ASIC has given us to remain successful in the future.
“This has required a significant amount of work, and I am pleased that the various associations, brokers, aggregators, lenders and consumer groups have come together to consider real solutions in such a timely and comprehensive manner.”
The MFAA played a key role in the formation of the CIF, which was formed to create a holistic and realistic industry response to the ASIC Review. It has sought to create reforms with consumer outcomes at their heart, whilst ensuring that Australia retains robust competition and the myriad benefits that mortgage brokers bring to the market, including Australia-wide access to credit.
For the first time, the CIF has defined a ‘Good Customer Outcome’, designed to go beyond current legal and compliance requirements, before addressing the ASIC Review’s six key recommendations.
“We have defined a ‘Good Customer Outcome’ as an outcome where ‘the customer has obtained a loan that is appropriate, affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan’. This provides the objective of the proposed reforms, and the benchmark which the industry will use to assess ourselves against,” Mr Felton said.
“In terms of specific reforms, the report outlines that the industry can address the risk of brokers encouraging customers to borrow more than they need by paying upfront commission on funds drawn down and utilised net of offset.
“Lenders and aggregators recognise the risks that may arise from volume-based bonus commissions, campaign-based commissions and volume-based bonus payments to brokers and these payments are expected to cease by 1 January 2018 - if they have not already - giving consumers confidence that recommendations from brokers are not biased towards a particular lender.
“Broker clubs will be transformed into tiered servicing arrangements that deliver better standards of service for the customer and do not further reward the broker. These will be assessed against a balanced scorecard based on good consumer outcomes, not only the volume of loans sold.
“The report proposes reforms to other ‘soft-dollar’ incentives as well. Conferences will have more educational content, will be in business-appropriate locations and must either be open to all brokers, or invitations must be based on a balanced scorecard that excludes volume. Lender entertainment will be limited to a value equivalent to $350 per broker, per event, and both lenders, aggregators and brokers must record all hospitality above $100 in a register that is easily accessible by consumers,” Mr Felton said.
In an effort to provide greater transparency to regulators and consumers, lender ownership of aggregators and broker groups will now be disclosed if ownership is greater than 20 percent, or if there is sufficient influence via directorships or other positions, or a ‘white label’ product that is offered by a substantial shareholder.
Mr Felton said these measures are designed to specifically address the issues raised by ASIC, but that the proposed reforms would not work in practice – or in the perception of consumers – without clear reporting and strong governance in place.
“Sitting alongside these reforms will be a new public reporting regime to provide better disclosure for customers, to ensure they can make informed choices. The reporting covers areas such as lender coverage and breadth of choice, as well as weighted average commission rate earned by aggregators.
“The CIF is also proposing an ASIC-approved code for all participants in the mortgage industry. This ‘mortgage broking industry code’ would apply to all players across the value chain. It may be a new standalone code or an addition to existing codes, and adherence to it could even become a future licence condition of relevant ACL holders.
“We are completely confident in brokers’ ability to create consistently good consumer outcomes, but we’re equally confident in the industry’s ability to do more to show transparency and ensure the trust we’ve earned from consumers is maintained in the long term. I am looking forward to continuing our work with the CIF and ASIC and implementing these reforms,” Mr Felton said.
The CIF’s report to government is available at: https://www.mfaa.com.au/sites/default/files/users/user130/CIF_Report_Submitted_281117_0.pdf