The Mortgage and Finance Association of Australia has stopped short of endorsing options which can break the nexus between high-risk loans and bumper commissions by describing lots of the choices presented to them as unviable and risking unintended consequences.
The body for mortgage brokers has researched a set of choices to reduce conflicts of interest and poor outcomes for customers in an almost fifty page response to ASIC’s Review of Broker Remuneration but finally found that many choices on the table ultimately devalued the importance of investment in mortgage brokers and were unworkable.
MFAA CEO Mike Felton known for realistic answers to the issues faced by the sector stated that the window of opportunity to deliver meaningful structural change for them was quickly closing. If we are to boost consumer outcomes throughout the finance and mortgage value chain with minimal disruption for our associates, we have to embrace change voluntarily.
Mr Felton Said that among the following steps for the industry is to work with ASIC to jointly define what “good customer results” were and how they are quantified before real reform could be made.
The mortgage broking industry has attracted substantial scrutiny following the operator’s report with over half of all mortgages originated from broking networks at a price of about $4600 based on analysis performed by UBS. Payments to mortgage brokers have risen by 18 percent every year and in 2015 reached $2.4 billion.
The MFAA Report, which was sent to treasury a few weeks ago, researched five choices to reduce conflicts of interest that were canvassed by regulators for mortgage broker websites and brick and mortar brokerages.
This included lower commissions for high-risk loans, fee for service models, smaller upfront commissions and conventional upfront commissions, but finally baulked at encouraging them because of unintended consequences.
The MFAA made some progress on wiping out the practice of agents offering clients super-sized mortgages through their mortgage broker website where agents recommend considerable amounts of money are abandoned in an offset account and the corresponding commission is pocketed by the mortgage broker.
The MFAA is recommending that the easiest way to end this practice is by simply paying commissions on the percentage of the loan that’s drawn and earning zero commission on the percentage from the offset account payable to the agent. It also recommended to provide more transparency about “soft dollar” payments where agents were rewarded with travel and hospitality.
Another option the MFAA believed was decreasing mortgage broking commissions for higher-risk mortgages with high loan-to-valuation ratios. This included a structure called a pivot whereby the commissions would fall for each five percentage points a LVR (loan-to-value ratio) moved higher.
In the example being considered the upfront commission on a mortgage composed with an LVR of 95 percent could be one-third lower than a mortgage composed with an LVR or 65 percent.
The MFAA said it would be unwise to present an LVR pivot now for fear of unintended consequences like locking out first-home buyers. Additionally, it said that it might introduce unnecessary complexity to the commission model and decrease worker productivity industry wide.
The report also rejected the fee-for-service version, which it described as suffering from numerous shortcomings and might see an agent subsidising another and could break the nexus between agent remuneration and financial value.
Fee for service is a model that’s been widely adopted by many businesses facing similar problems around conflicts of interest like in the retail financial information space.
The Sedgwick Remuneration Review that came out one month following the ASIC report and has been funded by the Australian Bankers Association who also commended the fee for service model stating it will be in the long-term interests of clients.