The Australian Securities and Investments Commission (ASIC) has informed the Joint Parliamentary Committee on Corporations and Financial Services that it does not propose that mortgage broker commissions be banned.

However ASIC has reiterated its conclusions in its Review of Mortgage Broker Remuneration REP 516 that:
“• The standard commission model (upfront and trail commissions) can be improved. The current model has the potential to encourage brokers to place consumers in larger loans, as commission amounts are generally calculated based on the size of the loan. We have suggested that this risk could be reduced by changing the standard commission model so that brokers are not incentivised purely on the size of the loan.
• Industry should move away from other bonus commissions and bonus payments: volume and campaign-based commissions and bonus payments to lenders’ staff have the potential
to contribute to poor consumer outcomes and may place smaller lenders at a competitive disadvantage.
• Industry should move away from soft dollar benefits, which are widespread. These can encourage poor consumer outcomes and place smaller lenders at a disadvantage.”

The report focussed on two key conflicts of interest ASIC identified in the current broker remuneration model: “Product strategy conflict” and “Lender Choice Conflict”. The product strategy conflict is where a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment; and the lender choice conflict is where 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.

Industry response

In addition to submissions made in response to ASIC’s Report, the Government is considering reports from the Australian Bankers Association and a Combined Industry Forum.

The Combined Industry Forum (CIF) responded to ASIC REP 516 with its own report which also takes into account the ABA’s Retail Banking Remuneration Review.

The CIF includes mortgage brokers and representatives, aggregators, referrer aggregators, lenders, industry bodies (ABA, Mortgage and Finance Association of Australia (MFAA), Finance Brokers Association of Australia Limited (FBAA), Customer Owned Banking Association (COBA) and the Australian Finance Industry Association (AFIA)) and CHOICE.

The CIF report defined ‘Good Customer Outcome’ as: “The customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”

The CIF considered various current commission models and ultimately endorsed a continuation of  the standard commission model which includes upfront commission paid on settlement of the loan and trail commission paid over the life of the loan.

ASIC “found it common for remuneration structures to pay commissions on the total amount of borrowing approved, rather than the amount of funds drawn down”.

The CIF concluded that the principle to pay commissions based on the funds being utilised by the customer directly addresses the biggest risk to consumers arising from product strategy conflict. Accordingly it says that mortgage brokers should no longer be paid on facility limits or have a financial incentive to recommend larger loans that initially have large offset balances.

As long as this principle is satisfied, the CIF says there should be no restrictions placed on lenders adopting additional methodologies of calculating commission payments.

The CIF decided that:

• The standard commission model will avoid financial incentives that encourage consumers to borrow more than they need or will use, for example by basing commissions on facility draw down net of offset;
• Volume-based and campaign-based commissions paid by lenders and aggregators are recognised as raising potential conflicts of interest and poor customer outcomes and are expected to cease;
• Non-monetary benefits will only be given based on a balanced scorecard and good customer outcomes, and benefits given by lenders will be capped;
• Ownership models and commercial relationships will be made clear on all marketing materials, including websites, where ownership is greater than 20 per cent, so consumers have the right information to make informed choices;
• ASIC and consumers will be given clearer information on where loans are written, commissions paid and interest rates, to increase transparency and accountability in the industry.

Retail bank staff remuneration was the subject of an independent review commissioned by the ABA in 2017 .

The Review concluded that adoption of its recommendations will mean that in respect of in-scope retail bank staff (importantly, including Home Lenders) and their Managers:

• Incentives are no longer paid to any retail staff based directly or solely on sales performance;
• Instead, eligibility to receive any personal incentive payments will be based on an assessment of that individual’s contribution across a range of measures, of which sales (if included at all) will not be the dominant component and the maximum available payments will be scaled back significantly for some roles.