Industry denounces ‘ridiculous’ UBS report

From The Adviser.

Broker associations and several members of the industry have slammed a recent UBS report that claimed mortgage brokers are “overpaid”, saying that the data is “wrong” and the findings are “ridiculous”.

In an analyst note entitled, Are mortgage brokers overpaid?, analysts Jonathan Mott and Rachel Bentvelzen argued that the new bank levy could be offset by the banks if they cut broker commissions.

The analysts suggested that broker commissions exceeded $2.4 billion in 2015, and added 16 basis points, or $4,600 to the cost of a mortgage.

The damning note went on to argue that the cost of broker commissions are factored into how a bank costs its home loans, which the UBS analysts said were then borne by mortgage customers.

“Although mortgage broker commissions are paid by the bank, not the customer, commissions are factored into the bank’s cost of funding and have been a driving factor in mortgage repricing in recent years,” they said.

Touching on the ASIC and ABA reports on mortgage broker remuneration, the UBS analysts claimed that the bodies had “called for sweeping changes to the way brokers are remunerated”.

It also referred to an 18 per cent “blow out” in commissions paid to brokers since the financial year 2012 and said there was an “unrealistic economic rent being extracted by the mortgage broking industry”.

The analysts concluded that “while a mortgage is a large financial commitment, it is a simple, commoditised product” and could therefore “be easily provided by robo-advice”.

Report is ‘garbage’

Several members of the industry have lambasted the note, stating that the analysis is using incorrect data and thus drawing unfair and damaging conclusions.

Peter White, the executive director of the Finance Brokers Association of Australia, called the report “garbage” and said that the average broker commission was between $2,500 and $3,000 a deal (not the $4,500 quoted by UBS).

Speaking to The Adviser, Mr White said: “This report is way off the mark. To me, it just doesn’t make sense. The data is flawed and before they start making comments, they need to ensure that they have information that is actually backed by fact.”

He continued: “To suggest that there are 16 basis points added to every mortgage because of a broker’s involvement is the most ridiculous comment to make. It’s the most ridiculous comment I’ve seen in the last 12 months. The reality is you pay the same rate in the bank as you do through a broker, so where did that come from? It’s the same interest rate.”

Mr White concluded: “The report is garbage and I’m really disappointed that UBS has gone out and released something that is so fundamentally flawed. UBS is a global bank, it shouldn’t be making these sorts of mistakes. It makes them lose all credibility in the marketplace.

“UBS need to restructure their research department. They are certainly not doing their job and they are an embarrassment to UBS.”

MFAA ‘extremely frustrated’ by report

The Mortgage & Finance Association of Australia (MFAA) also said that it was disappointed by the tone of the note, and argued that several points were either “incorrect” or “misleading”.

Backing the value of brokers, the MFAA said that working with a customer to secure a mortgage can be extremely complex and often requires months of work from a broker (not to mention the subsequent years as the broker supports the customer for the life of the loan), and goes far beyond what robo-advice can offer.

MFAA CEO Mike Felton commented: “Complexity gravitates towards the broker channel (as does the need for service) and brokers go to great lengths to help these clients find a suitable mortgage product.”

Mr Felton also said he thought UBS’ commissions calculation was wrong, stating that they had divided the total amount of broker commissions in 2015 (which included upfront and trail commission) by the number of loans written by brokers in 2015.

He said: “This has given them a commission per mortgage that is about double what it actually is in the year of acquisition.”

The MFAA CEO added that an “interrogation of the data demonstrates that the increases to total remuneration to the broking channel are not due to changes to commission structures”, but due to “the simple fact that every year, more Australians are turning to brokers,” Mr Felton said.

“We are extremely frustrated by this report,” he added, concluding that the MFAA was “extremely disappointed that a reputable organisation would issue a report like this without ensuring that the data they’re working with is correct”.

‘A bank extolling the virtues of banks’

Both associations emphasised that the ASIC report had also not recommended “sweeping changes”, but instead “improve” the standard commission model, and highlighted that the ASIC report actually recognised the value in mortgage brokers – with chairman Greg Medcraft telling the media after the release of the report that brokers deliver “great consumer outcomes”.

The interim CEO of aggregation group AFG, David Bailey, said that it was important to note that the UBS report was issued by a company that owns an investment bank.

“This is a bank extolling the virtues of banks”, he said.

Mr Bailey added that UBS’ “elevation of the ABA’s Sedgwick Review to being a significant analysis of the broking industry is quite frankly outrageous”.

“We have said all along that the ABA Review is nothing more than the opinions of a single interest group, the banking lobby group. How can a review of the broking industry not have any serious involvement from the very sector it is purporting to review? And furthermore, why conduct the review when the regulator is already doing so with significantly more scope and analysis?,” he said.

“Secondly, UBS extol the virtues of robo-advice. With over 3,400 loan products sitting within our mortgage broking technology, we believe that a mortgage is anything but a commoditised product…

“We find it simply ridiculous that these conclusions can be drawn and reported as fact,” Mr Bailey concluded.

UBS: mortgage brokers a $2.4bn waste of money

From Mortgage Professional Australia.

Broker commissions are “an illustration of excesses built into the financial system” according to a damning report on brokers by UBS.

Yesterday the global investment bank sent out an analyst note entitled ‘Are Mortgage Brokers Overpaid?’ which argued that broker commissions, which they state exceeded $2.4bn in 2015, should be cut.

UBS analysts Jonathan Mott and Rachel Bentvelzen wrote that “Average commissions are now $4,600 per mortgage, which we believe is disproportionate for advice provided on a simple, commoditised, single product, particularly when compared to the fees charged by Financial Advisors for ‘simple’ financial advice ($200 to $700).”

Broker commissions add 16bp per annum to the interest rate of every single mortgage customer, whether broker originated or not, the analysts claim. They note that commissions accounted for 23% of the costs in the major banks’ personal/consumer divisions in 2015. They do however note mortgage broker costs are not commonly disclosed by the banks.

The report warns that “we expect the banks to negotiate materially lower fee-for-service mortgage commissions in coming months”. They suggest that the advice for mortgages could be provided by robo-advice and the savings could be passed onto brokers “which could help offset anticipated repricing for the Bank Levy.”

Fiery response from the industry

“This report is garbage” responded FBAA executive director Peter White when asked for comment. White questioned the $4,600 figure used by UBS, saying the average commission was more like $2,500-$3,500 a deal. Whilst noting that banks did have the power to renegotiate commissions, White argued ASIC’s recent Review of Mortgage Broker Remuneration identified no reason for such a change.

Brokers should not be concerned by the report, according to White, who said that any changes to commissions would be at most ‘tweaking’.

MFAA CEO Mike Felton claimed UBS’ calculations had a fatal flaw: “Unfortunately, this report’s key finding is wrong. UBS has taken the 2015 upfront commissions plus the 2015 trail commissions (which includes commissions on all loans written by brokers in past years), and divided them by only the number of mortgages written in 2015. This has given them a commission per mortgage that is about double what it actually is in the year of acquisition.”

“We are extremely disappointed that a reputable organisation would issue a report like this without ensuring that the data they’re working with is correct.”

Felton also warned that UBS had misinterpreted the findings of ASIC’s review, which UBS took to show risks posed by brokers but the MFAA saw as showing no evidence of systematic harm caused by brokers.

Banks voting with their feet

Commissions are already under review by the banks, following the publication of the Sedgwick Review. Consequently, all major and several non-major banks have now committed to decoupling commissions from loan size by 2020. Sedgwick did not, however, recommend necessarily reducing commissions.

UBS’ report comes on the same day that HSBC revealed it is re-entering the broker channel in partnership with Aussie Home Loans, a move Aussie CEO James Symond claimed was “a vote of confidence in mortgage broking, considering the ASIC report, Sedgwick Report, bank levies.”

Symond added that “HSBC is such a prestigious, prominent, global player and for them to be jumping into the mortgage broking marketplace is not to be underestimated in terms of the confidence they have in the industry.”

UBS’ numbers

  • Total broker commissions in 2015: $2.4bn
  • 18% increase in broker commissions since FY2012
  • $4,623 – average commission per mortgage
  • 22.6% of banks’ personal consumer costs down to commissions
  • 16bp total cost of mortgage broker commission for every mortgage

ASIC’s Michael Saadat on the remuneration review

From Mortgage Professional Australia.

As brokers, lenders and consumers go head-to-head over ASIC’s remuneration review, the man behind it gives MPA editor Sam Richardson an insider’s view

ASIC launched its review of broker remuneration in November 2015, and since then brokers have talked about little else. It’s very possible you’ve at some point criticised ‘those bureaucrats at ASIC’; if so, Michael Saadat is your man. You won’t find Saadat’s name in the review, but ASIC’s senior executive leader played a huge role in its production, staying behind the scenes. Now, two years later, he’s finally free to talk about the review and how it could change your business.

What ASIC wants
Over two years ASIC collected 200 million data points from 1.4 million home loans, before boiling that data down to 243 pages. “It was a very time-consuming process,” Saadat recalls. “Not only did we look at the raw data and provide conclusions, but we also controlled the data for customer characteristics.”

In their quest to achieve an ‘apples for apples’ comparison of broker and non-broker customers, Saadat and his team broke down comparisons into, for instance, the difference in loan amounts taken out by low-income customers going to brokers and to banks.

Now ASIC is explaining its methodology and the data it has collected to the industry.

“We’ve had a few roundtable discussions with stakeholders; we’re planning on having more, and when we speak at industry events or conferences we will definitely be discussing the report and taking questions from people who are interested in hearing more about it,” Saadat says. At the time of writing he was confirmed to speak at the Annual Credit Law Conference in October.

These discussions will chiefly concern ASIC’s six proposals. Firstly, ASIC wants to change the standard commission model to take into account factors other than loan size (1). It also recommends moving away from bonus commissions (2) and soft-dollar benefits (3). ASIC believes there should be clearer disclosure of ownership structures (4) and proposes establishing a new public reporting regime on consumer outcomes and competition in the home loan market (5). Finally, ASIC wants to improve the oversight of brokers by lenders and aggregators (6).

Now that the review has moved into the consultation phase, Saadat is effectively powerless. Under Minister for Revenue and Financial Services Kelly O’Dwyer, the Treasury will be managing the process, in which industry associations, lenders, aggregators, consumer groups and individuals can have their say on the proposals before the end of June. Saadat, however, will not be taking part: “We wouldn’t put in a submission to our own report.”

On the sidelines
ASIC is now consigned to the role of spectator, left on the sidelines, observing the furore surrounding the separate Sedgwick review, which published its final report a few weeks after ASIC’s.

Stephen Sedgwick’s Australian Bankers Association-sponsored review ran concurrently with ASIC’s, but Saadat insists there was no collaboration between the two. “[ASIC] did not share any data with him that has not been made public by ASIC,” he says.

Nevertheless, in its final report ASIC did repeatedly refer to Sedgwick’s review and was condemned for doing so by the MFAA and FBAA.

ASIC was right to refer to the Sedgwick review, Saadat insists: “We know the Sedgwick review only covers the banks, and that’s why we said in our report that the banks need to work with the rest of the industry in responding to [ASIC’s] recommendations.”

When writing his report, Saadat had no idea what Sedgwick’s recommendations would be; in fact Sedgwick’s final report was published just 30 minutes before Saadat talked to MPA.

Sedgwick’s recommendations go much further than ASIC’s, urging banks to decouple commission from loan size. ASIC had recommended a change to the standard commission model to avoid incentivising brokers to write larger loans, while recommending that banks work with brokers to develop a response.

Instead the major banks, on the day Sedgwick published his recommendations, all agreed to implement them in full by 2020. This unilateral decision bypassed brokers, ASIC and the Treasury’s consultation process.

Despite this, Saadat says he is “pleased that industry is working to improve remuneration structures to create better outcomes for consumers, and improved trust in the sector”.

Acknowledging the review and the banks’ response, he “encourage[s] all industry stakeholders to provide feedback to Treasury as part of the current consultation process”. Commissions, in Saadat’s view, “are obviously commercial arrangements, and it’s up to both individual banks, aggregators and brokers businesses to work out what those commercial arrangements should be”.

Expanding ASIC
Regardless of whether Saadat or Sedgwick get their way, ASIC’s remit looks likely to expand. Sedgwick and the banks want ASIC to enact regulation to facilitate a move to a new commission structure, while ASIC will play a role in implementing whatever rule changes the government decides to introduce after June. wFurthermore, Saadat explains, “ASIC’s ability to intervene may also be bolstered by law reform proposals that are currently being considered by government, including those recommended by the Financial System Inquiry”.

Already Saadat has more immediate work on his plate: a shadow-shopping of brokers by consumers, which he will start planning by the end of 2017. “It is early days,” Saadat says. “We’re planning on commencing that work before the end of this calendar year, and are still working through the detail.” Shadow shopping will take place, Saadat confirms, regardless of the Treasury’s ongoing consultation process on the remuneration review, and “once it kicks off it’s going to be a pretty significant piece of work”.

ASIC’s work will not end with commissions. Instead Saadat and his team are faced with a Sisyphean task. The role of referrers was flagged by the review for further investigation, while consumer groups have demanded more oversight of cross-selling. And, says Saadat, the data that was published was just the tip of the iceberg.

For now it’s up to the industry to make changes, he says. “It was more about us trying to get the industry to respond without being forced by legislation to have change imposed upon them. We think the industry has an opportunity to respond and to take positive steps to make changes that will deliver wimproved consumer outcomes without necessarily needing the government to legislate for changes.”

Brokers Under The Microscope At Senate Standing Committee

From Australian Broker.

Lender-imposed conditions that brokers write a certain number of loans per month or year to retain accreditation need to go, said Peter White, executive director of the Finance Brokers Association of Australia (FBAA).

Speaking in front of the Senate Standing Committee on Economics in a government inquiry into consumer protection in the banking, insurance and financial sector on Wednesday (26 April), White said these restrictions – called minimum volume hurdles – were reducing a broker’s ability to write loans for whatever lender they desired.

“What that creates is a very bad consumer outcome because a broker can only give guidance on loans for lenders that they’re accredited to,” he said.

These restrictions mean that while a broker may be doing the right thing for the borrower with regards to the panel of accredited lenders they have access to, there may be another outside that scope which is more suitable.

“Unfortunately they can’t reach into that because they are constrained by the aggregator’s agreements and those accreditations. That’s generally restricted because they don’t have volumes to reach that lender,” he told the panel.

“Those sorts of things need to go.”

White also criticised elite broker clubs, saying he would outlaw them if he could. With brokers given access to better speed of applications, this was “unreasonable” and “completely unfair” to the borrower.

“You have an innocent borrower at the backend there. He’s sitting behind a broker who may only give a specific lender one deal every three months,” he said. “That gets penalised because they don’t have the volume. It’s got nothing to do with the borrower.”

When asked about soft dollar benefits, White said that these incentives needed to become more transparent although completely outlawing them may not be the best solution.

There was also nothing wrong with the current base model of commissions that brokers are paid today, he said, referring to the FBAA’s global research that found Australian brokers were paid below the global average. As for trail, this provided a number of positive consumer outcomes when it was introduced.

“With trail being brought into place, that was there to minimise the outcome of churn and also to provide a greater level of service to the borrower that wasn’t necessarily being provided by the banks.”

The FBAA’s research showed that taking away trail led to higher upfront commissions, a greater level of churn, and sales of additional products that may not be acceptable in the market.

Finally, White expressed his opposition to the fixed upfront commission recommended by consumer advocacy group CHOICE.

“The baseline of lending is very standard,” he said. “But it’s the knowledge and capabilities of what adds onto that to make it appropriate to that borrower’s specific needs or their lending structure. That becomes quite a significant skill set and it’s not the same.

“If you do a mum and dad home loan for example, that’s a very different transaction to doing development finance and working through feasibility studies and presales and all the research and due diligence that goes into that.”

Although these are generally higher loan sizes, the amount of work definitely increased as well, he said.

Separately, ASIC said Improved tracking of broker data is required

Difficulties by lenders to compile clear, robust data on brokers has prompted the Australian Securities & Investments Commission (ASIC) to call for improved systems that allow banks and non-banks to track and report on broker activity.

Speaking in front of a Senate Standing Committee on Economics in a government inquiry into consumer protection in the banking, insurance and financial sector on Wednesday (26 April), ASIC deputy chair Peter Kell said that collecting data for the regulator’s recent Review of Mortgage Broker Remuneration was a challenge.

The main difficulty was that some lenders could not track simple issues such as the loans that were originated from and the amount of remuneration paid to each individual broker. Certain lenders also had no way to track the soft dollar benefits offered.

“One of the recommendations we have made is that this information should be provided through a new public reporting regime of consumer outcomes,” Kell said. “[This will] require lenders to set up systems to allow them to track this [and] also provide some transparency in the market.”

Kell emphasised that these gaps in information were not as a result of any unwillingness by the lenders to provide data. However, “it was apparent that the systems that some of the lenders had in place were not as robust and didn’t give them as clear a picture as I think they themselves would wish,” he told the committee.

The exercise was a “wakeup call” for some of the lenders, he said.

ASIC recommended a public reporting regime to eliminate current issues with the non-consistent structures between lenders with different systems, metrics and numbers.

“Having a public reporting regime is a good discipline to ensure that this data will be collected going forward,” Kell said.

However, the challenge for ASIC now is determining how to compile the collated information in a manner that both the industry and the public can see.

Major bank reveals lack of ‘clarity’ around aggregator oversight

From The Adviser.

A big four bank has acknowledged that data quality and public reporting could be further improved in the mortgage industry, revealing it ‘does not have clarity’ around some aggregator data.

Speaking last week at the final leg of the second series of the Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — NAB general manager for broker distribution Steve Kane touched on Finding 13 of the report, which notes that the regulator encountered “significant issues with the availability and quality of key data” from some participants.

According to the remuneration report, the lack of some data requested “affected [ASIC’s] ability to analyse the data for some of [its] core review objectives [and] raises concerns with the participants’ ability to monitor consumer outcomes in relation to their businesses”.

Some of the examples of the lack of data included an inability by a lender to “automatically track whether a particular loan was arranged by a particular individual broker or broker business”, which “increases the risk that lenders may be dealing with unlicensed persons” and “means that lenders have little visibility of patterns of poor loan performance connected to these individuals or businesses”.

At the NAB event, Mr Kane acknowledged that there was further work to be done in this area.

He said: “This is an interesting one. As a lender, we have lots of information on individual brokers and the loans they submit and we have lot of information about aggregators and their total portfolio… but we don’t have, for example, lots of information about any individual firms that operate (with many brokers under them) under that particular aggregator. That is just one example. So, we don’t have clarity around that.”

Mr Kane added that it is therefore “fair to say that the aggregators will be working much more closely with lenders around data” in the future.

The general manager for broker distribution went on to say that, through Proposal 6*, it was “clear that ASIC expected brokers to obviously adhere to NCCP, responsible lending and compliance issues around maintaining a licence, having your own ACL or being accredited under someone else’s’ ACL… [and that] the aggregators need to understand that brokers are actually compliant with all of those things… [and] actually be able to provide evidence of that and good consumer outcomes too”.

He added: “And they’re saying that the lenders need to do that as well…[they] need to ensure the aggregators have the proper information, proper record keeping, and proper understanding of the roles and responsibilities in relation to the legislation and good consumer outcomes.”

Public reporting regime

As well as improving oversight of brokers and broker businesses, ASIC has also proposed to Treasury that there be a new public reporting regime to “improve transparency in the mortgage broking market” (Proposal 5).

Specifically, this proposes that there be public reporting on:

(a) the actual value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied;

(b) the average pricing of home loans that brokers obtain on behalf of consumers;

(c) the average pricing of home loans provided by lenders according to each distribution channel; and

(d) the distribution of loans by brokers between lenders to give consumers a better indication of the range of loans that brokers within the network offer.

Touching on this proposal, Mr Kane said that one such solution could be that brokers give their customers “information that says ‘I’ve settled 50 deals this year, I’ve used this number of banks, I’ve obtained this amount of finance and this has been the price on average I’ve achieved for the customer’. It could get down to this level, which is very important in terms of disclosure to the customers,” he said.

“This all goes to the governance of oversight perspective, which is really now starting to say: ‘Do we, as an industry, have a clear understanding of all of the consumer outcomes that brokers are providing to their customer? Do we have proper understanding of whether NCCP responsible lending is met at every instance for the customer? Do we have a robust process to identify when a broker has done wrong thing and therefore the accreditation has been removed from lenders and aggregators? Do we have a clear line of sight and understand what the process is for those people? Do we have a much stronger regime in relation to a register of all of these ‘bad apples’ and how do we go about doing that? How do we go about ensuring that the end consumers know that they are not to be dealing with those people?’”

Mr Kane concluded: “When it comes to governance and oversight, it really is about accountabilities and responsibilities and understanding that disclosure to the customer about all the facilities that are available to them.

“So,” he said, “you can see that there is going to be far more reporting available to the public around these things.”

“Governance and oversight will play a much bigger role and therefore there will be much more work an information sharing and much more collation of performance and outcomes for consumers.”

The Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — also revealed that the big four bank believes that Australian brokers could achieve up to 73 per cent market share if reaction to the ASIC remuneration review is “right”.

NAB’s executive general manager for broker partnerships, Anthony Waldron, told brokers that the industry reaction to the current consultation on the ASIC report could further boost the third-party share of the market by improving trust.

Mr Waldron said that there is an “opportunity” if “industry can react and get this right”.

He explained: “It’s the opportunity for more people to understand what brokers do, it’s the opportunity to build trust even further in what you do. And if we can do that then we won’t be talking about 53 or 54 per cent of mortgages going through the broker community, we will be talking about more like the numbers in the UK where it is already in the 72 or 73 per cent.”

*Proposal 6 of ASIC’s Review of broker remuneration states that the regulator expects lenders and aggregators to improve their oversight of brokers and broker businesses, for example by using a consistent process to identify each broker and broker business (such as the use of the Australian credit licensee or credit representative number where relevant, or a unique number provided by the aggregator).

Mortgage Brokers Are Essential To The Home Loan Industry

It has been interesting reading the media coverage of the recently released ASIC report. Some suggest brokers have been “slammed”, others suggest its  more a touch on the tiller in terms of commission models. Having read the ASIC report in full – more than 240 pages, I think there are three points worth making.

First, around half of mortgages are originated via the broker channel, it varies by lender of course, but consumers get more responsive assistance and access to industry knowledge via a broker, and our surveys indicate much higher satisfaction ratings than those going direct to a bank. Because brokers look across lenders, they should have access to a wider range of options, and (perhaps) better pricing. Different types of customers use brokers differently.  But there is a valid and important role for brokers.

Broker originated loans may be more “risky” but this is more to do with the types of consumers who choose to use them.

Second, the current commission models are complex and not transparent, especially as it relates to soft commissions, incentives and other elements. In addition, the ownership of brokers is unclear. As a result consumers cannot be sure they are getting unbiased advice, and it may be the ownership structures and commissions get in the way.  As ASIC says:

Remuneration and ownership structures can, however, inhibit the consumer and competition benefits that can be achieved by brokers.

ASIC also says:

Brokers almost universally receive commissions paid by the ‘supply side’ of the market (i.e. the lender or aggregator), rather than by the consumer. Our review identified significant variability and complexity in remuneration structures between industry participants. The common element across all remuneration structures for brokers, however, was a standard commission model made up of an upfront and a trail commission.

ASIC are not suggesting the removal of the commission model, but they are suggesting significant changes to it. There will be ongoing consultation on the nature of those changes. But I think the enhanced requirements for disclosure of ownership structures is as important. Transparency is good. Better transparency is better.

We did a piece on brokers on our video blog (in 2016) – in the Truth About Mortgage Brokers.

But third, there is something which continues to bug me. Financial Advisors have a requirement to provide “best interest” advice (see ASIC’s report today), whereas Brokers and Lenders dealing with often the largest transaction a household will undertake have a lower hurdle of “not unsuitable”. This bifurcation of the supervision regime makes no sense.

Both advisors and brokers should be clearly working in the best interest of the clients. So why not create a standard and unified regulatory framework, covering all product and financial advice?  Now, I understand ASIC has two departments, separately looking at financial advice and mortgage lending but this is not a good enough reason. Time to put all advice, whether for wealth or lending, under the same regime. Not least because investment property loans are actually about wealth building, and should be considered as part of a wealth management strategy.  One third of mortgages are for investors, and our research highlights investors are more likely to access brokers.

The requirement for transparency, quality of the advice, and consumer outcomes should be the same. Far fetched? No.

The Financial Markets Authority in New Zealand says:

Financial advisers are people who give advice about investing and other financial services and products as part of their job or business. They include financial planners, mortgage and insurance brokers and people working for insurance companies, banks and building societies that provide advice about money, financial products and investing.

They do not have this bifurcation.

All financial advisers must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. In determining what a reasonable financial adviser would do, the following matters must be taken into account:

  • the nature and requirements of the financial adviser’s client or clients
  • the nature of the service and the circumstances in which it is provided
  • the type of financial adviser

See more in section 33 of the Financial Advisers Act 2008. See examples below of how these obligations apply to advice on insurance and credit products.

ASIC Review of Mortgage Broker Remuneration Released

The Treasury has released the ASIC review on mortgage broker remuneration, together with two info-graphics on the industry. The findings will shape the future of the mortgage industry, and are now open for consultation.

Importantly, ASIC says the standard model of upfront and trail commissions creates conflicts of interest.

There are two primary ways in which these conflicts may become evident. Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan). In this report, we have referred to this as a ‘product strategy conflict’. Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’.

ASIC has put forward six proposals to improve consumer outcomes and competition in the home loan market:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.
ASIC consider that these proposals should be implemented before a further review of the market is conducted in three to four years to determine whether additional changes are required.
They also propose to conduct a targeted review of the suitability of advice
provided by brokers (including through a shadow shopping exercise)
commencing in 2017.

Here is the Treasury release.

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government requested ASIC undertake an industry-wide review of mortgage broker remuneration.

The Review found that the current mortgage broker remuneration and ownership structures create conflicts of interest that may contribute to poor consumer outcomes.

The Review outlines a number of proposals for industry aimed at improving consumer outcomes, including:

  • improving the standard commission model for mortgage brokers;
  • moving away from bonus commissions and soft-dollar benefits;
  • increasing the disclosure of mortgage broker ownership structures; and
  • improving the oversight of mortgage brokers by lenders and aggregators.

The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.

The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Friday, 30 June 2017

ASIC briefs O’Dwyer on remuneration review

From Australian Broker.

The Australian Securities and Investments Commission (ASIC) has briefed Financial Services Minister Kelly O’Dwyer about its broker remuneration review, suggesting a shift away from volume-based commissions and soft dollar incentives.


As reported by the Australian Financial Review, the regulator also recommended increased disclosure by banks with vertically integrated business models.

ASIC handed the report over to O’Dwyer on Wednesday (15 March).

The regulations are likely to eliminate volume-based incentives from the industry as they have the potential to encourage brokers to write more loans then necessary.

Soft incentives such as sponsorships, overseas trips and prestigious industry events for high end brokers will also be on the chopping block.

Despite these recommendations, AFR said that the ASIC report endorses the core commission-based remuneration system used by brokers.

Every Consumer of Financial Products Should Read This!

In a speech “The role of financial regulation in protecting consumers“, the Governor of the Central Bank of Ireland highlights the abundant empirical and theoretical research to show that consumers do not always act in their own best interest in making financial decisions and that biases can be exacerbated by the design of financial products.

This is a very important issue, especially given the current debates about the role of banking, and the cultural behaviour of bankers. In a word, without appropriate regulation and protection, consumers are at a significant disadvantage. More needs to be done to empower consumers in their dealings with financial services firms.  International financial literacy studies indicate that a majority of the world population do not have sufficient knowledge to understand even basic financial products and fail to make effective decisions to manage their finances and the risk associated with them.

A vast empirical literature shows that consumers tend to make poor financial choices, taking on too much debt, misunderstanding investment risk and choosing financial products that do not match their needs. Over recent decades, the formal economic theory to rationalise these patterns has been developed, with insights from economics and psychology blended in the vibrant fields of behavioural economics and behavioural finance.

The fast pace of financial innovation has created a complex world for consumers, where the range of available financial products is broad, and the consequences of financial choices are significant. Coupled with this, the typical household tends to have a limited personal track record in making financial decisions, since the purchase of financial products happens only infrequently. This is problematic, since the demands for financial sophistication and knowledge are sizeable if a consumer is to navigate safely through the options put forward by providers of financial services. Financial decisions often require consumers to assess risk and uncertainty, for example, and to consider trade-offs between the near term and the long term. A growing body of academic literature shows that, among the general population, the level of financial knowledge, skills and ability to consider such complexities is low.

There is also a growing body of evidence from the field of behavioural economics that consumers are subject to behavioural biases when making decisions. In other words, decisions are affected by emotions and psychological experiences, by rules of thumb and accepted norms. For example, consumers can exhibit present-biased behaviour, which leads them to over-value payoffs today relative to payoffs in the future, a bias which can be associated with self-control problems.  In addition, households can be overly attached to the status quo and suffer inertia bias, taking default options in financial contracts, failing to switch product or provider even when there are clear benefits to switching.  Retail investors also tend to follow naïve investment strategies rather than identifying superior options.  Consumers can also exhibit loss aversion bias, meaning that they care more about potential losses than making equivalent gains.

The design of financial products and services can serve to ease or exacerbate these biases.  In this context, behavioural economics shows that framing matters – put simply, firms can present the same information in different ways and this can lead to different choices by consumers.  A key insight from the recent experience with financial crisis and from the growing literature on behavioural economics, is that consumers do not always act in their own best interest. In addition, market forces do not always act to reduce consumer mistakes. Firms face their own incentives when designing and framing products, and these incentives may not align with the best interests of the consumer. For example, analysis by the Office of Fair Trading in the UK shows that firms can frame prices in a way that plays on consumer biases. Empirical research also suggests that firms can choose to market the salient features of products that appeal to consumer biases, while shrouding the less favourable aspects that could alter a consumer’s choice to purchase that product. The interactions between misaligned incentives and behavioural biases can adversely affect consumer welfare, and there are many examples of analytical work that highlight such costs.


Aggregator slams ABA Review’s “ludicrous” broker findings

From Australian Broker.

There is a “significant risk” that the Australian Bankers’ Association (ABA) Retail Banking Remuneration Review will draw “false conclusions” on broker remuneration, according to the Australian Finance Group (AFG).

Managing director of AFG, Brett McKeon, said the review does not have the information gathering powers or resources required to include broker remuneration within its scope. Instead, it should cede this responsibility to the review currently being conducted by the Australian Securities & Investments Commission (ASIC).

The ABA “should not risk reducing confidence in its findings by referring to, or basing recommendations on, isolated anecdotal statements,” he said in a letter to Stephen Sedgwick AO, who is heading up the review.

An example of how the Sedgwick review misses the point can be found in its recently released Issues Paper which highlighted the banking industry practice of increasing the commission rate of a mortgage product to increase its sales, he said.

McKeon added that this emphasis failed to consider the combination of incentives that a bank may offer brokers, the consumer benefits of brokers fulfilling their responsible lending obligations under the National Consumer Credit Protection Act 2009 (NCCP Act), and negative factors such as increased processing delays caused by these types of promotions.

“The suggestion that a broker will chase higher commission at the risk of recommending something unsuitable or risk clawback and damage their reputation and therefore their business for a few dollars more is ludicrous.”

“In fact, AFG has provided extensive empirical information to ASIC for the purposes of the ASIC Remuneration Review that indicates that there is no real correlation between the commission rate offered and the market share of a lender.”

McKeon also slammed the Sedgwick Issues Paper for alleging that “third-party mortgages are likely to be larger, paid off more slowly, and more likely to be interest only loans than those provided to equivalent customers who dealt directly with bank staff”.

“It is extremely disappointing that the above statement was included in the Issues Paper, albeit with the final acknowledge that the information that was considered is not conclusive,” he said.

Instead, it was important to note that the attributes of loans introduced to the banks through the broker channel directly relate to the attributes of customers who sought out the broker in the first place.

“For example, consumers seeking larger loans may seek the assistance of a broker in order to maximise potential savings.”

Finally, McKeon said there was a danger that the Sedgwick review could treat the roles, responsibilities and risks associated with mortgage brokers as equivalent to financial planners.

“It is important to remember that the government intentionally excluded mortgage brokers from the Future of Financial Advice reforms (FOFA),” he said.

“This approach recognises that the regulatory failures that the government sought to address with FOFA did not include residential mortgages and that mortgage brokers were already subject to an appropriate protective regulatory regime under the NCCP Act, including the responsible lending obligations.”