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.
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.