The call for a reshaping of mortgage broking industry remuneration is the flashpoint of the Hayne royal commission report, with Labor giving in-principle support to all the recommendations while the Treasurer says a ‘fee for service’ model for the industry would hurt competition.
Commissioner Kenneth Hayne has recommended that home loan borrowers, not lenders, should directly pay service fees to mortgage brokers.
Hayne has also called for mortgage brokers to be subject to the laws which regulate financial advisers and, as credit licence holders, be bound by proposed new information-sharing and reporting obligations for financial advisors.
He recommended that aggregators should no longer be remunerated by commissions paid by lenders but should be paid a fee either by brokers or by lenders. He also has recommended that introducers must disclose their benefits, such as commissions.
These are massive changes and Hayne wants a tight turnaround. He said that the prohibition of trail commissions on new loans should take no longer than 12 to 18 months (existing trail commissions would not be affected). After changes to trail commissions, the next step should then be to prohibit lenders from paying other commissions to mortgage brokers.
The government has only agreed to adopt 75 out of 76 of the Hayne recommendations. Treasurer Josh Frydenberg told the AFR the proposed changes to mortgage broking would hurt competition. He said the government would not require borrowers to pay fees.
"The government recognises the importance of competition in the home lending sector and will proceed carefully and in stages, consistent with the recommendation, with reforms to ensure that the changes do not adversely impact consumers' access to lenders and competition in the home lending market," Frydenberg said.
The Finance Brokers Association of Australia criticised the broker recommendations, saying the removal of up-front commissions would reduce competition because borrowers would not pay fees and brokers would go out of business. It accused the Commission of wanting to “destroy 20,000 small businesses”.
The Mortgage & Finance Association of Australia chief executive, Mike Felton echoed this view.
“Destroying the viability of the mortgage broker channel would immediately reduce competition and drive customers back into the branches of the banks with the largest branch networks,” Felton said.
“I fail to see how decimating the broker channel, leaving Australians with a handful of lenders to choose from, is good for competition, or good for customers.”
While Felton said he was disappointed that trail commissions were earmarked to go, he welcomed the government’s “measured approach” to implementing the recommendation.
Hayne rejected claims that changes to the remuneration of brokers would be disruptive and would diminish competitive benefits for consumers. He also discounted ANZ CEO Shayne Elliott’s argument that smaller borrowers would be adversely impacted by these changes.
“The present system of remunerating mortgage brokers is conflicted remuneration,” the report says.
Hayne found that consumers expected that a broker’s first loyalty would be to the borrower but “all too often advisers have preferred their own interests against the interests [of] clients, despite having an obligation to pursue the best interests of their clients”.
This change would see any fees for service paid by the borrower and could be paid out of the principal loan. Commissioner Hayne did not specify how such a fee would be structured.
He has also recommended that a Treasury-led working group, including representatives from the ACCC and APRA, should be established to monitor and, if necessary, adjust his recommended mortgage broker remuneration model. That group should also monitor any fee that lenders should be required to charge to achieve a level playing field, in response to market changes.
He has asked that this group pay attention not only to these two changes but also to the effect of the changes on: interest rates; competition between lenders; competition between lenders and brokers; and developments in the residential mortgage market.
Commissioner Hayne says changes such as these were adopted in the Netherlands in 2013 without any significant adverse consequences to the mortgage broking industry.
The report recommends that mortgage brokers comply with proposed new rules for financial advisors such as Australian Banking Association’s reference checking and information-sharing protocol should be mandatory as should the reporting of ‘serious compliance concerns’ to ASIC on a quarterly basis.