Are CBA Demerger Plans On Hold “indefinitely”?

Yesterday, CBA announced it was suspending the demerger of its wealth management and mortgage broking businesses slated to occur this calendar year, in order to better address the recommendations from the royal commission; via Australian Broker.

Following the news, Daniel John, head of group public affairs and communications at Commonwealth Bank (CBA), provided further clarification to Australian Broker on the “pragmatic and realistic” decision to halt the split.

He explained, “The reason we didn’t give a timescale is there’s a degree of uncertainty out there, especially coming off the royal commission.

“It’s very much on hold. Whether it would happen in 2020 or 2021 is very difficult to predict. We don’t want to get to the point where we’re making another announcement in six months’ time saying we’ve put it off again.”

John reaffirmed the bank’s commitment to the demerger but acknowledged that “it could be revised.”  

To illustrate his point, he cited the sale of Colonial First State Global Asset Management (CFSGAM) to Mitsubishi UFJ Trust and Banking Corporation last year. The total cash consideration of the transaction was $4.13bn, and CFSGAM was pulled from the entities included in the scheduled demerger.

John said that the bank would be “duty bound by our shareholders and customers” to give real consideration to such “a definitive and attractive” offer.

However, a statement from Aussie Home Loans said the suspension of preparations around the demerger is “indefinite”.

The CBA-owned brokerage currently operates 225 franchise stores and counts more than 1,000 brokers in its network.

According to CEO James Symond, CBA’s announcement “doesn’t impact [Aussie’s] focus on [its] customers, brokers and team members”.

“We remain fiercely independent in our operations and approach to providing outstanding customer outcomes and it is worth noting that 66% of the loans provided by Aussie in 2018 were with lenders outside of the big four banks.

“We will continue working on our strategy towards building a safer and stronger Aussie,” he added.

Several months ago, CBA announced that Jason Yetton and Andrew Morgan were to head the new wealth management and mortgage broking entity NewCo, as CEO and CFO respectively.

“At the moment, nothing has changed in regards to Jason’s or Andrew’s position because we’ve still got to manage those businesses. For the time being, they’ve still got roles to play in making sure that we run those businesses for the benefit of the consumers, customers, and shareholders,” said Daniel John.

Government Reneges on Trail Commission Position

Yesterday afternoon, the coalition government announced a dramatic change to its position on the future of trail commissions, via Australian Broker.

Rather than barring trail commissions on new loans starting in 2020, Treasurer Josh Frydenberg announced that they will be left to operate as is with a review held in three years’ time.

In the statement, mortgage brokers were said to be “critically important” for securing better consumer outcomes in the mortgage market.

“The Government wants to see more mortgage brokers – not less,” the media release stated.

MFAA CEO Mike Felton said, “The announcement reflects the fact that the case for the removal of mortgage broker trail commission has not been made, nor has it been demonstrated that existing trail arrangements lead to poor customer outcomes.”

In past weeks, there has been confusion throughout the broking industry as to what benefit was being sought from eliminating the trail commission payment structure.

“Trail commission for mortgage brokers is deeply misunderstood, and is often confused with ongoing commissions earned by other financial services providers,” Felton said.

He explained, “Trail is contingent income that is only paid to a broker if the loan is not in arrears, is not refinanced and does not involve fraud.

“As such, it is an important control mechanism that aligns the interests of brokers and their customers, and ensures that the broker focuses on the customer relationship rather than simply pursuing the next transaction.”

Aussie Home Loans CEO James Symond also welcomed the news. 

“Today’s announcement is a positive step by the treasurer and provides a good timeframe for this consultation process to take place,” he said.

Meanwhile, FBAA managing director Peter White welcomed the move but said that policy changes were needed to back it.

“The Coalition’s announcement to keep trail commissions has been delivered in a pre-election environment so uncertainty remains about how exactly this will work after the election. Hayne simply didn’t get it but it’s now the case that both sides of politics are now very clear on the importance of mortgage brokers.

“Both the Coalition and Labor recognise that the recommendations of the royal commission would in fact hand power back to the big four banks, which is an absurd result,” he added.

Treasurer Delays Trail Abolition Date

Treasurer Josh Frydenberg has said that the government will look at reviewing the impacts of removing trail in three years’ time rather than abolishing it next year as originally announced, following concerns regarding competition, via The Adviser.

In an announcement on Tuesday (12 March), Treasurer Josh Frydenberg said that “following consultation with the mortgage broking industry and smaller lenders, the Coalition government has decided to not prohibit trail commissions on new loans but rather review their operation in three years’ time”.

The review, to be undertaken by the Council of Financial Regulators and the Australian Competition and Consumer Commission (ACCC) will therefore look at both the impacts of removing trail as well as the feasibility of continuing upfront commission payments.

Both the abolition of trail and upfront commissions were recommended by commissioner Hayne in his final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

While the government had initially said in its official response to the final report that it would ban trail commission payments for new mortgages from 1 July 2020, the Treasurer has now said that the removal on trail will instead be reviewed in three years’ time.

“Mortgage brokers are critically important for competition and delivering better consumer outcomes in the mortgage market. Almost 60 per cent of all residential mortgages are settled by mortgage brokers,” Mr Frydenberg said on Tuesday.

“There are 16,000 mortgage brokers across Australia – many of which are small businesses – employing more than 27,000 people. The government wants to see more mortgage brokers, not less,” he said. 

The Treasurer added that ASIC’s 2017 review of broker remuneration “did not identify trail commissions as directly leading to poor consumer outcomes and did not recommend the removal of trail commissions”.

“Only the government can be trusted to protect the mortgage broking sector and ensure that competition is strengthened so consumers get a better deal,” he said.

Mr Frydenberg added that the government was “taking action on all 76 recommendations contained in the final report” of the banking royal commission and had already announced a number of new measures that will be brought in, including:

  • a best interests duty that will legally obligate mortgage brokers to act in the best interests of consumers;
  • a new requirement that the value of upfront commissions be linked to the amount drawn down by consumers;
  • a ban on campaign and volume-based commissions; and
  • a two-year limit on commission clawbacks.

“These changes will address conflicts of interest in the industry by better aligning the interests of consumers and mortgage brokers,” Treasurer Frydenberg said.

AMP Bank Tweaks Broker Commissions

AMP Bank has revealed that, effective for loans settled from January 2019, it will be calculate broker commissions for its home loans on the net balance, instead of the total approved facility amount, via The Adviser.

The bank becomes the third large lender to change the upfront commission structure to the new model in the past few weeks, after NAB and Westpac announced similar changes.

The bank outlined that it had made the changes “in line with Sedgwick recommendations” from his Retail Banking Remuneration Review (which helped form the basis of the Combined Industry Forum’s reform package).

Mr Stephen Sedgwick AO recommended in his report last year that remuneration should not “directly link payments to loan size”, suggesting that alternative payment arrangements could include: commission based payments that take the loan to value ratio (LVR) or the loan type, or “the quality of the advice given to the customer into account; and, preferably arrangements between lenders, mortgage brokers and aggregators that are not product based such as lender-funded fees for service”.

Speaking of the changes, an AMP Bank spokesperson said that the change “centres on ensuring customers obtain loans that are appropriate for their needs and objectives”.

The spokesperson continued: “Brokers and advisers play a vital role in our community, providing more than 50 per cent of all home loan applications and the portion of the market they service continue to grow, reflecting the important service they provide.

“Like brokers and advisers, AMP Bank is committed to ensuring we continue to deliver good customer outcomes so we’re making some changes to the way commissions are calculated for home loans.

“These are changes that have been committed to by the industry and we have announced the detail early as we think it’s important to give brokers and advisers early visibility of the changes.”

Lenders expected to make changes by the end of the year

NAB became the first major lender to implement the recommendations from the ASIC and Sedgwick reviews, which were backed by the Combined Industry Forum package of reforms.

Its white label brand, Advantedge (and Advantedge-funded brands, such as Homeloans) announced the same changes in tandem, and Westpac announced earlier this week that the bank and its subsidiaries (St. George, Bank of Melbourne and BankSA) will link upfront commission payments for standard home loans to net debt utilisation and inclusive of loan offset arrangements, rather than the approved loan limit, effective 1 January 2019.

The CIF recently hosted an event which further outlined its work on mortgage broking reforms and reiterated that lenders are expected to make the remuneration changes by December 2018

Westpac Moves On Mortgage Broker Commissons

Westpac Group has announced that it will introduce new changes to the way brokers are remunerated as part of a move to “enhance transparency and customer outcomes”, via The Adviser.

Effective 1 January 2019, Westpac and its subsidiaries, St.George, Bank of Melbourne, and BankSA, will link upfront commission payments for standard home loans to net debt utilisation and inclusive of loan offset arrangements, rather than the approved loan limit.

The group noted that the amount of upfront commission paid for most home loans will now be calculated as a percentage of the amount drawn down and used by the customer at settlement, excluding any amount which remains in an offset account.

Westpac general manager, home ownership, Will Ranken, said: “We know many of our customers value the independent service and advice mortgage brokers provide.

“Westpac Group continues to be an active participant in the Combined Industry Forum and supportive of its work to ensure better customer outcomes.

“We believe the changes we are introducing will be the start of delivering a more transparent commission model that better meets the needs of consumers and industry.

“We remain committed to supporting mortgage brokers to ensure we are providing the right home loan solutions for our customers.”

Westpac also stated that the new commission structure for standard home loans will also allow for a subsequent upfront commission for when brokers arrange loans for customers with funds held in offset accounts for a short term future purpose like renovations.

The bank said that the changes will mean if a customer takes out a $400,000 home loan and purchases a property for $350,000 and puts $50,000 of that loan into an offset account, the broker will be paid an upfront commission based on the $350,000 amount. Westpac added that if the customer then draws down the $50,000 in the offset account in the twelve months following settlement, the broker will receive a subsequent upfront commission calculated on the $50,000.

In addition, Westpac Group noted that it will implement improvements to increase the transparency of customer disclosure of the commissions mortgage brokers receive, including providing details of how the commission paid to mortgage brokers will be calculated.

According to Westpac, the new changes will also provide brokers with access to priority service arrangements for their clients if they “consistently meet quality loan application measures”.

The group added that there will be no requirement for brokers to meet any dollar volume business threshold to access these new arrangements.

Westpac Group said that the measures are part of its commitment to implement reforms recommended by the  Combined Industry Forum (CIF) to “ensure better consumer outcomes”, which it said includes preserving and promoting competition and consumer choice, and improving standards of conduct and culture in mortgage broking.

Westpac also stated that The changes to commission calculations do not apply to Construction Loans, Equity Access Loans or Portfolio Loans as the commissions for these products remain unchanged in-line with the Combined Industry Forum recommendations, and said that changes to the commission model and service model will take effect by 1 January 2019.

Changes to make commission payments more transparent to Westpac Group customers will start being made in February 2019.

Westpac’s move follows similar broker remuneration changes announced by NAB in September.

Banker incentives a ‘significant cause’ of misconduct: RC

From The Adviser.

An incentive program run by a major bank, which rewards bankers with bonuses for achieving home loan sales targets, was a “significant cause” of misconduct involving “collusion” between its employees and introducers, according to Commissioner Kenneth Hayne.

In the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne alleged that NAB’s Star Sales Incentive Plan, which offered rewards for employees that achieve home loan sales targets, was a “significant cause” of misconduct involving the bank’s employees and third-party introducers in the years between 2013 and 2016.

In March, during the course of the first round of public hearings held by the commission, it was revealed that some  NAB employees had engaged in fraudulent conduct when processing home loans referred to the bank by introducers.

In one instance, a NAB employee was found to have wilfully entered false information on a customer’s profile and in relation to an introducer’s contact details, and had accepted, or encouraged other employees to accept, documentation from an introducer as verification to support lending applications.

NAB acknowledged in its written submission to the royal commission that the misconduct that was identified “was attributable to several systemic issues in relation to its Introducer Program” and the structure of its incentive program.

However, the bank claimed that there was no evidence that the incentive program was a “significant” cause of the conduct, as opposed to having “contributed to a small number of people choosing to behave unethically”.

Commissioner Hayne, however, has dismissed NAB’s contention, claiming that its employees, which engaged in misconduct, were motivated by the incentive program.

“I do not accept this last proposition,” Mr Hayne said. “The proposition makes sense only if it is read as asserting that some of those who engaged in the relevant conduct [were] driven by the pursuit of financial gain, but that there was, or may have been, some other unknown reason why others participating in the conduct acted as they did.”

Commissioner Hayne continued: “NAB has not previously suggested that those who acted as they did were motivated by anything but financial gain.

“The evidence shows that from as early as April 2015, NAB was aware that one of the potential root causes of the conduct was the Star Sales Incentive Plan that the relevant bankers were operating [under].

“The investigation of the conduct confirmed that the incentive program was driving inappropriate behaviour.”

Commissioner Hayne added that the “scorecards by which employees were assessed” were “weighted heavily in favour of financial matters”, stating that “marginal weight attributed to compliance-related matters”.

“In the words used in one of the documents produced by NAB, the ‘risk/reward equation for bankers [was] unbalanced in favour of sales over keeping customers and the bank safe’,” the commissioner said.

While Commissioner Hayne noted that NAB has since moved many of its employees to a different incentive plan (the Short Term Incentive Plan), and proposes to introduce further changes to its remuneration structures from 1 October 2018, “that program presently continues to reward bankers with bonuses for achieving targets for the sale of home loans,” he said.

Further, Commissioner Hayne noted that NAB employees were also told that introducers were required to refer a minimum of $2 million in loans per year for personal lending and $10 million a year for business lending, which he claimed “tied” the commissions paid to introducers to the amounts of loans referred that were drawn down.

“This created a further incentive for collusion between bankers and introducers and NAB itself identified introducer commission structures as potentially not driving the right behaviours,” Mr Hayne said.

Commissioner Hayne concluded: “The incentive arrangements used by NAB for bankers and for introducers were a significant cause of the conduct.”

RC looks at broker commissions

The financial services royal commission has taken a close look at remuneration structures (and more specifically, commissions) operate in the mortgage space, and has gone as far as to question whether some broker commissions are in breach of the NCCP.

In the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne claimed that lenders paying value-based upfront and trail commissions could be in breach of section 47(1)(b) of the National Consumer Credit Protection Act (NCCP).

Section 47(1)(b) states that licensees must “have in place adequate arrangements to ensure that clients are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by the licensee or its representatives”.

Commissioner Hayne pointed to conclusions reached by the Australian Securities and Investments Commission (ASIC) in its broker remuneration review and by Commonwealth Bank (CBA) in its submission to the Sedgewick review.

The commissioner stated that such reports suggested that value-based commissions were “reliably associated” with higher leverage, and that loans written through brokers have a higher incidence of interest-only repayments, higher debt-to-income levels, higher loan-to-value ratios and higher incurred costs compared with loans negotiated directly with the bank.

“Those conclusions point towards (I do not say require) a conclusion that the lenders did not have adequate arrangements in place to ensure that clients of the lender are not disadvantaged by the conflict between the intermediary’s interest in maximising income and the borrower’s interest in minimising overall cost,” Commissioner Hayne said.

However, Commissioner Hayne claimed that breaches of section 47 “are duties of imperfect obligation in as much as breach is neither an offence nor a matter for civil penalty”.

The public is being invited to respond to Commissioner Hayne’s interim report from the financial services royal commission, which covers the first four rounds of hearings.

Submissions in response to the interim report can be made on the Royal Commission website and must be received no later than 5pm on 26 October 2018.

Commissions ‘might’ breach NCCP: RC

From The Adviser.

Lenders paying value-based upfront and trail commissions to mortgage brokers could be in breach of their legal obligations, according to the interim report of the financial services royal commission.

In the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne has claimed that lenders paying value-based upfront and trail commissions could be in breach of section 47(1)(b) of the National Consumer Credit Protection Act (NCCP).

Section 47(1)(b) states that licensees must “have in place adequate arrangements to ensure that clients are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by the licensee or its representatives”.

Commissioner Hayne pointed to conclusions reached by the Australian Securities and Investments Commission (ASIC) in its broker remuneration review and by Commonwealth Bank (CBA) in its submission to the Sedgewick review.

The commissioner stated that such reports suggested that value-based commissions were “reliably associated” with higher leverage, and that loans written through brokers have a higher incidence of interest-only repayments, higher debt-to-income levels, higher loan-to-value ratios and higher incurred costs compared with loans negotiated directly with the bank.

“Those conclusions point towards (I do not say require) a conclusion that the lenders did not have adequate arrangements in place to ensure that clients of the lender are not disadvantaged by the conflict between the intermediary’s interest in maximising income and the borrower’s interest in minimising overall cost,” Commissioner Hayne said.

However, Commissioner Hayne claimed that breaches of section 47 “are duties of imperfect obligation in as much as breach is neither an offence nor a matter for civil penalty”.

He continued: “Instead, breach of the general obligations may enliven ASIC’s power under section 55 to cancel or suspend the licensee’s licence.

“Hence, to refer this issue to ASIC would be to refer a matter that could not lead to any enforcement action other than cancellation or suspension of a licence.”

The commissioner added that any consideration of changes to the way breaches of section 47 are enforced would be “overtaken by any industry-wide change to remuneration structures”, noting that “where the failure (if that is what it is) is industry-wide, it would not be the occasion to consider cancellation or suspension”.

Commissioner Hayne concluded: “For these reasons, I go no further than noting that continuing to pay intermediaries a value-based upfront and trail commission after the deleterious consequences of the practice had been identified might have been a breach of Section 47(1)(b) of the NCCP Act.”

APRA Says Digital Distribution Removes the Need for Branch and Broker Networks

The chairman of APRA has suggested that digital distribution and servicing could threaten the existence of branch and broker networks.

From The Adviser.

The chairman of the prudential regulator, Wayne Byres, was speaking at the 2018 Curious Thinkers Conference in Sydney on Monday (24 September) when he outlined a “clash of predictions” for the future of the financial sector.

Stating that the pace of change “makes predicting the future difficult, and is why the crystal balls of even the most well informed are cloudy”, Mr Byres said that “everyone agrees major change is inevitable”.

Noting that it was “clear” that companies, regulators and international agencies are “all grappling to predict the impact that technology-enabled innovation will have on the structure of the financial sector and the viability of existing business models”, Mr Byres conceded that the “consensus also seems to be that it is too soon to tell whether the financial world faces evolution or revolution”.

Despite this, the chairman of the Australian Prudential Regulation Authority (APRA) told delegates that whatever the future scenario is, the “production and delivery of financial services will change”.

“Put simply, many traditional business models will no longer be competitive without significant change driven by technological investment,” Mr Byres said.

“Moreover, some incumbents will struggle to afford that investment; for others, the challenge will be successfully managing a large transformation program.”

Later in his speech, the APRA chairman forewarned that while most technological advancements in finance have previously “worked to enhance the market positioning of the major incumbents”, the future will “likely be different”.

Despite several futurists suggesting that brokers will survive digital disruption and others outlining that brokers will become more crucial in the future as trust in finance deteriorates, Mr Byres suggested that broker networks could be under threat in the future.

He stated: “New technologies have dramatically lowered barriers to entry. Cloud computing, for example, allows small organisations to operate innovative financial services without the need to maintain their own costly infrastructure and support staff.

“The advent of digital distribution and servicing removes the need for branch and broker networks.

“Open banking and comprehensive credit reporting will help new competitors to challenge established players. And, of course, regulators are making it easier to navigate the process of entry into the regulated financial system. Taken together, competition in the supply of financial services will only intensify.”

In conclusion, Mr Byres said that APRA’s role was to “make sure regulated entities are resilient and responsive to change, but not protected from it”, adding that while the regulator is responsible for promoting stability, “that does not mean standing in the way of change”.

He added: “Ensuring regulated entities are well managed, soundly capitalised and able to withstand severe stresses is designed to protect the interests of their depositors, policyholders or members.

“But to be clear, it is not APRA’s role to protect incumbent players when better, safer and more efficient ways of doing business emerge.

“Ultimately, we seek to look at it with a sharp focus on what is in the longer-run interests of their depositors, policyholders or members — not the business itself, or its owners — and make sure that boards and management are doing likewise.

“If that means their time is up, so be it. Our role then becomes ensuring they make an orderly exit from the industry.”

FBAA hits out at comments

The executive director of the Finance Brokers Association of Australia (FBAA), Peter White, hit out at the comments made by Mr Byres yesterday, telling The Adviser: “As it is, I certainly and completely disagree with this as being a current or near-term situation.”

The head of the FBAA highlighted that its research had recently showed that nearly 95 per cent of broker clients were satisfied with their broker, adding that more than half of the borrowing population uses a broker.

“So, digital distribution is not supported by fact,” Mr White said.

While the head of the FBAA suggested that digital home loans without any human intervention may be commonplace in 20 years’ time, he added that “we are a long way from this” in the near future.

Mr White told The Adviser: “For now, most people want to transact their home loan with a person, not a screen, and this won’t change for some time. Let alone the technical and legal barriers that still exist, the human element is still far more desired.”

In a shot across the bow, Mr White concluded: “So, for now (and once again), APRA seems to be out of touch with reality and people. Possibly they should be more so focused on their governance of ADIs given what we’ve all witnessed in the [banking] royal commission rather than out-of-focus speculation.”

Brokers targeted in major litigation proceedings

Maurice Blackburn Lawyers has confirmed that it is preparing court proceedings against the major banks and brokers in regards to alleged breaches of the NCCP, according to The Adviser.

On Monday, media reports began circulating about rolling litigation being levelled at the major banks and brokers relating to alleged breaches of the National Consumer Credit Protection Act 2009 (NCCP Act).

The move follows on from questions asked by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry over whether credit providers have adequate policies in place to ensure that they comply with “their obligations under the National Credit Act when offering broker-originated home loans to customers, insofar as those policies require them to make reasonable inquiries about the consumer’s requirements and objectives in relation to the credit contract, to make reasonable inquiries about the consumer’s financial situation, and to take reasonable steps to verify the consumer’s financial situation”.

Earlier this year, the royal commission was damning in its critique of the lenders’ policies when it came to ensuring customers can afford their home loans, with ANZ being called out for their “lack of processes in relation to the verification of a customer’s expenses”, and both Westpac and NAB revealing that there had been instances of their staff accepting falsified documentation for loans.

Further, Westpac recently admitted to breaches of responsible lending obligations when issuing home loans to customers and agreed to pay a $35 million civil penalty to resolve Federal Court proceedings.

While there has not been any systemic issues with arrears rates or housing affordability to date, Maurice Blackburn has suggested that the reliance on benchmarks, such as the Household Expenditure Measure, coupled with a softening property market and the “maturity of interest-only loans”, could “leave thousands in financial ruin, staring at the prospect of bankruptcy”.

Further, the law firm took aim at the mortgage broker market, relying on some controversial statistics from investment bank UBS regarding the third-party channel.

Court proceedings expected “in the coming months”

In a statement to The Adviser, Maurice Blackburn principal Josh Mennen confirmed that the law firm is pursuing legal action, stating: “A combination of banks’ relaxed lending standards and brokers’ involvement in loan sales has resulted in widespread debt over-commitment that threatens the stability of the broader economy. A survey of more than 900 home loans conducted by investment bank UBS found that around $500 billion worth of outstanding home loans are based on incorrect statements about incomes, assets, existing debts and/or expenses.

“This means 18 per cent of all outstanding Australian credit is based on inaccurate information, often caused by poor advice or misrepresentations by a mortgage broker eager to generate a sale commission.”

It should be noted that the figures quoted are in relation to a UBS report which asked borrowers about the accuracy of their home loan applications, and that representatives from several bodies — including ASIC — have called into question the weight of this response, arguing that “for many consumers the additional work and additional steps that banks and other lenders are taking to verify someone’s financial situation won’t be apparent to them”.

For example, ASIC’s Michael Saadat, senior executive leader for deposit takers, credit and insurers, said last year that “consumers are probably not the best judge of what banks are doing behind the scenes to make sure borrowers can afford the loans they’re being provided with”.

In his statement to The Adviser, Mr Mennen continued: “A staggering 30 per cent of loans surveyed had been issued based on understated living costs and around 15 per cent on understated other debts or overstated income.

“Add to the equation the fact that a huge proportion of mortgage loans issued over the past decade were ‘interest-only loans’. These loans have an initial period (usually five years) where only the interest on the loan is repaid. However, after the interest-only period ends and the principal is also paid down, the loan repayments can increase between 30–60 per cent.”

While the principal conceded that this “problem has been contained” by investors being able to sell their interest-only investment properties and therefore “often fortunate enough to sell the investment property at a gain or at least break even, clearing the mortgage without too much pain,” he suggested that the current environment in which interest rates are rising, while some property markets (such as Sydney and Melbourne) are declining, could be cause for concern.

“These factors, in combination with the maturity of interest-only loans, will further drive up distress sales in a stagnant or contracting market and may leave thousands in financial ruin, staring at the prospect of bankruptcy,” the lawyer said.

Realising a prediction from UBS analysts that the evidence of “mortgage mis-selling and irresponsible lending” found during the royal commission could result in the banks being subject to “very costly” class actions, Maurice Blackburn is now mounting legal cases against banks and/or brokers.

Mr Mennen said: “We believe that, as consumers losses are crystallised, many will have strong claims for compensation against their lender and/or mortgage broker for breaches of the National Consumer Credit Protection Act 2009 (NCCP Act) for failing to comply with responsible lending obligations including by not making reasonable inquiries and verifications about customers’ ability to repay the loan.

“We are acting for many such customers and are preparing to commence court proceedings against major banks in the coming months.”

It is not yet known which brokers or broker groups, if any, will be targeted in the legal action.

However, the corporate regulator has reiterated its view that lenders should be held accountable for breaches of responsible lending obligations, irrespective of whether the loan was broker-originated.

In its most recent Enforcement Outcomes report, which outlines the action the financial services regulator has taken over the first half of the calendar year, the Australian Securities and Investments Commission (ASIC) stressed that lenders should not offload blame to third parties when a loan is found to be in breach of responsible lending obligations.

NAB makes changes to broker commissions

From Australian Broker.

NAB is introducing the changes in line with recommendations of the ASIC Broker Remuneration Review and Sedgwick Retail Banking Remuneration Review.

From November 2018, NAB will calculate the upfront commission a broker receives for a home loan based on the amount drawn instead of the total approved facility, and net of any offset facility.

This will mean that if a customer receives a $500,000 home loan and puts $100,000 of that loan into an offset account, the broker will receive commission on the drawn amount of $400,000.

NAB executive general manager of broker partnerships, Anthony Waldron, said NAB is committed to mortgage broking as a channel of choice for consumers, and that this change will support brokers to continue to put customers’ interests first.

He said, “Mortgage brokers play an important role in helping Australians arrange their home loans, and NAB continues to value and support them.

“We recognise that Australians increasingly use mortgage brokers, and we want to continually improve as an industry to deliver the best outcomes for Australians.”

Waldron is also chair of the Combined Industry Forum (CIF), which is made up of industry bodies, lenders, mortgage brokers and their representatives, aggregators, introducers, and consumer groups.

“As an industry, we are working together to make changes that are focused on doing the right thing, and to improve consumer trust,” Waldron said.

The CIF released its reform package in December 2017 – six principles that members are committed to implementing to ensure better consumer outcomes, preserve and promote competition and consumer choice, and improve standards of conduct and culture in mortgage broking.

The industry has also proposed a standard definition for ‘good customer outcomes’, which looks at the size and structure of the loan, affordability, responsible lending requirements and individual customer needs.

In coming months, NAB has said it will make further changes in line with the agreed principles of the CIF to ensure better consumer outcomes and improved standards of conduct and culture, while preserving competition in mortgage broking.