The Commonwealth Government has published ASIC’s review of mortgage broker remuneration and invited all interested parties to make a submission on the proposals outlined in the Review.

ASIC made six proposals to improve consumer outcomes and competition in the home loan market, including:
(a) changing the standard commission model to reduce the risk of brokers seeking to inappropriately maximise their commissions;
(b) moving away from bonus commissions and bonus payments to reduce conflicts of interest;
(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 and referrers by lenders and aggregators.

What the review looked at

ASIC’s review focused on the way in which commissions and other remuneration passes between each of the participants in the mortgage broking market, rather than simply considering the remuneration received by the individual broker who recommends a home loan product to the consumer.

ASIC considered that the remuneration received by other participants (e.g. aggregators and broker businesses) was also likely to influence the outcomes that consumers receive.

The review covered 17 lenders (representing over 19 different brands), 14 aggregators and 44 broker businesses. Together, ASIC estimates the lenders and aggregators each covered over 90% of the home loan market and mortgage broking market.

ASIC collected 157 data points about each home loan for 1.4 million home loans.

Findings

ASIC’s findings included:

• Brokers almost universally receive commissions paid by the ‘supply side’ of the market (i.e. the lender or aggregator), rather than by the consumer. ASIC’s 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;
• In addition to receiving upfront and trail commissions for each individual loan they arrange, aggregators also receive bonus commissions from lenders which can be passed on to brokers. The two main types of bonus commissions are Volume-based commissions and Campaign-based commissions;
• In addition to monetary commissions, brokers also receive soft dollar benefits from lenders and aggregators. The main types of soft dollar benefits are loyalty programs and travel and hospitality-related benefits;
• there are clear differences in the types of consumers going to brokers compared to those going directly to lenders;
• consumers going through broker channels obtained loans with higher LVRs and larger loans in dollar terms consumers going through broker channels obtained significantly more interest-only loans;
• Data ASIC obtained did not show a consistent trend that brokers obtained either cheaper loans or more expensive loans;
• ASIC obtained information from lenders about the level of consumer expenses provided to lenders by brokers, or directly to lenders. The responses were consistent with concerns that ASIC has previously raised about lenders and brokers not making sufficient inquiries into consumers’ expenses;
• ASIC considered whether broker loans performed better or worse than non-broker loans from a repayment perspective. The largest difference after controlling the data was a 25% greater chance of a broker loan entering 30 day arrears, while for some lenders the differences were much smaller;
• competition in the home loan market is affected by ownership relationships between lenders and aggregators and the inability of smaller lenders to access or remunerate brokers in the same way as larger lenders;
• Referrers are paid almost as much as brokers. ASIC proposes that the remuneration for referrers be reviewed by lenders to ensure that it is not leading to poor outcomes. ASIC also proposes that lenders significantly increase their governance and oversight of the referrer channel as for brokers to ensure that misconduct is not occurring.