Spotlight on conflict of interest
There has been significant noise in relation to the review by the Australian Securities and Investments Commission (ASIC) into the mortgage broking market to understand the effect of brokers’ remuneration structures on the quality of consumer outcomes.
ASIC, having analysed information on 1.4 million individual home loans as well as sales and commission on around $550 billion of new home loans, made six recommendations:
Change the standard commission model to reduce the risk of poor consumer outcomes;
Move away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
Move away from “soft dollar” benefits, which both increase the risk of poor consumer outcomes and can also undermine competition;
Ensure clearer disclosure of ownership structures in the home loan market to improve competition;
Establish a new public reporting regime of consumer outcomes and competition in the home loan market; and
Improve the oversight of brokers by lenders and aggregators.
Of course, in any industry there are good, average and bad brokers, and there are issues around the fact that certain incentives that brokers receive can and probably do cause a conflict of interest.
One of the more prominent points is the “soft dollar” benefits. Some brokers offer a loan to their clients because it will count towards a travel benefit or conference. Or they offer a loan because they will be paid more on that product. This is particularly relevant to loans that are “white labelled” (home branded) through the broker’s aggregator.
Remember, this is not the majority of brokers. But there are some lazy/ bad brokers who only sell three or four products to their clients. This is wrong.
Also bear in mind that the legislation for the industry could arguably be reviewed, as it does not stipulate that a loan must be suitable for a client; instead it refers to an assessment that needs to be carried out as to whether the “credit contract is ‘not unsuitable’ for the consumer”.
Nevertheless, it is apparent to me that ASIC does place a high degree of value on mortgage brokers. It recognises that the public needs the services that brokers offer and that brokers “play a very important role in the home loan market”.