AFG defines its vision of changes in the committee structure
The main aggregator has written to the Treasury to share his thoughts on how brokerage commission structures could be changed to ensure good results for consumers.
As part of the invitation to comment on ASIC Mortgage Broker Compensation Review (submissions closed on Friday, June 30), the AFG has just made its response public.
Writing to the head of the Treasury’s financial system division, Diane Brown, the brokerage group noted that the ASIC report “recognizes the important role that mortgage brokers can play in promoting good outcomes for consumers. and strong competition in the mortgage market â, but warned that it wasâ essential âthat any actions taken following the reviewâ do not have the unintended consequences of stifling or inhibiting the mortgage brokerage industry, which will ultimately be to the detriment of all Australian homeowners and all Australians who aspire to own their own homes â.
For example, the brokerage group said that any introduction of standard fixed fees payable by the lender “would inevitably lead to significant market distortions which would lead to reduced competition and detrimental outcomes for consumers.” He argued that a flat rate “would discourage the provision of services by brokers to clients with larger and more complex transactions”, would provide the Big Four “with an opportunity to increase their existing oligopoly powers (as they would continue to reap the benefits of selling larger loans to consumers), while the lack of follow-up payments “would discourage the pursuit of an ongoing relationship between broker and client and make the relationship more transactional.”
Changes to the standard commission model
In its response, AFG said the existing commission model for brokers was therefore “not broken”, but agreed that borrowers should not be encouraged to borrow more than they need.
He suggested that lenders could reduce this risk for borrowers and improve outcomes for consumers by making the following changes to existing commission structures:
1. pay initial commissions on the amount withdrawn rather than the approved amount (this may require upfront payments in installments, for example for construction loans and lines of credit); and
2. Introduce balanced scorecards for brokers who recognize appropriate measures of the quality of loan applications.
According to the AFG, these changes should not lead to an economic drift from the broker to the lender “because the devaluation of the service provided by the brokers would have significant and long-term adverse effects for consumers by easing the competitive tensions that currently exist in credit. industry”.
He added: âIt is essential that anti-competitive behavior is not allowed to proliferate under the guise of regulatory reform. ”
Call to remove obstacles based on volume
AFG also suggested that lenders “should be encouraged to consider whether their loan pricing methodologies should be reviewed in order to reduce the incentive for consumers to take out larger loans than necessary.”
He said lenders could implement these changes over time.
On bonus payments, the aggregator agreed that brokers “should not be encouraged to select a particular lender in order to achieve a volume-based bonus threshold” and stated that the practice of lenders of putting Ending the accreditation of a broker not to meet such hurdles is “clearly as damaging as the payment of volume-based incentives” and “should not be allowed”.
As such, AFG said now is the time for the industry to replace existing volume-based (VBI) incentives with payments “more aligned with positive outcomes for consumers and the services provided.”
He said work with lenders to develop “appropriate metrics” to replace VBI is already underway and “will reflect the amount of benefit for each lender so as not to adversely affect competition.”
While ASIC suggested removing the âsoft dollarâ benefits, AFG argued that spending should instead be focused on providing education and training that improves the quality of life support services. credit provided to consumers.
The submission revealed that AFG believes the vertical integration of mortgage brokerage business is “of concern” and supported ASIC’s proposal to require clear disclosure of ownership structures and public reporting of mortgage flows. broker activity.
He also suggested that ASIC should form a working group with lenders, aggregators and brokers to develop a standard set of information that lenders should provide to aggregators to help them “better understand the conduct of their brokers. “.
About the Australian Bankers Association Retail Banking Compensation Review Report (The Sedgwick Review), which was published in April 2017, AFG criticized the report’s comments on the mortgage brokerage industry, saying they were “misguided and open to allegations of bias or partisanship” because the ‘ABA commissioned and funded the report and defined its terms of reference.
The submission reads: âAFG has previously raised concerns that the ABA-sponsored review may draw false conclusions about broker compensation due to the limited and one-sided nature of the investigations that have been conducted.
âAFG is of the opinion that the failure to include all relevant stakeholders in the preparation of the ABA report is so fundamental that the associated recommendations are nothing more than the opinion of a single group of interest whose motivations may diverge from the fundamental objectives stated by ASIC of enhancing the positive contribution of brokers while improving consumer outcomes and competition in the mortgage market. ”
For this reason, AFG urged the government and the Treasury to treat the ABA report as “a single interest group submission in the mortgage industry”.
However, the group supported the report’s goal of encouraging banks to âeliminate the mis-selling of the products they manufacture and from which they generate significant profitsâ and agreed that âcultural changesâ were needed to reach this goal.
The submission concluded: âAFG urges the government to act to prevent some banks from using the ABA report and the government’s recently announced major bank tax as justification for implementing changes aimed at reducing the financial viability of the provision of brokerage services and marginalize much of the mortgage brokerage industry.
âIf such actions are successful, competitive tensions in the mortgage market would be greatly reduced and the existing oligopoly powers of the Big Four banks would increase to the detriment of consumers, the brokerage industry and lenders who do not have large credit networks. branches or other distribution networks. These results would not be consistent with ASIC’s stated goal of improving consumer outcomes and competition, âhe said.
[Related: Aggregators warn âsignificant workâ is needed on ASIC report]