For Mortgage Brokers, the times they are a changing
For anyone that has followed the proceedings at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry it will not come as news that mortgage brokers have been under the spotlight.
In particular, mortgage brokers are under fire for their remuneration structure and how that may be driving unwanted behaviour within the industry. Due to this perceived conflict there is increasing speculation that a best interests duty should be imposed on mortgage brokers, similar to the duty that was imposed several years ago now on financial advisers under the FOFA reforms.
For those that are unaware, mortgage brokers are generally remunerated based on an upfront and trailing commission linked to the loan they have assisted their client in obtaining.
In ASIC's view, these remuneration structures are not designed for good consumer outcomes.
Support for a best interests duty on mortgage brokers has been wide ranging. The consumer group CHOICE, the Reserve Bank of Australia and the Productivity Commission have all come out in support of such a duty being imposed.
So, how would such a duty be imposed on the mortgage broking industry?
The Productivity Commission believes that ASIC should impose a legal duty on mortgage aggregators owned by lenders to act in the consumer's best interest. A mortgage aggregator is a supervising entity under which the majority of mortgage brokers operate, it is akin (though not exactly the same) as a financial services licensee in the financial advice industry.
Increasingly, these mortgage aggregators have been purchased by the major banks. For example, Aussie Home Loans is actually a wholly owned subsidiary of CBA.
On the other hand, CHOICE appears to favour having a best interests duty imposed directly on mortgage brokers and believes it should mirror obligations that financial advisers are currently subject to.
Currently, the threshold for mortgage brokers to meet is that they must recommend a loan that is "not unsuitable" to their client. This is a lower bar than a best interests duty that is currently being mooted.
The difficulty I foresee if how to implement a best interests duty on a practical level. Would a broker be required to provide the cheapest possible loan for a client? What if the cheapest available loan is with a bank they are not accredited with or one which is not on the lending panel operated by their aggregator?
There is a significant practical difference here between mortgage brokers and financial advisers.
A financial adviser places his clients into a suitable product (or products) based on their risk appetite. However, the financial return of that product/s is not something that an adviser will generally be held liable for. So long as the product suited the client's risk appetite then the adviser will, generally, be held to have acted in the client's best interests.
A mortgage broker will also select a product for a client, this time not based on risk appetite but on the client's circumstances (eg are they lo-doc clients, credit impaired, PAYG etc etc). Once the selection is narrowed down the broker will then have to select a loan for that client with a known rate, and therefore financial impact, known.
Will a best interests duty mean that the broker has to select the cheapest rate at that point in time? What if a broker does not have access to the cheapest rate, will they be required to refer the client on to a provider who can access that rate?
With all this in mind it bears remembering how significant a role mortgage brokers play in the financial services industry. They allow clients to compare rates more easily amongst lenders. Crucially, they also allow smaller lenders without access to the branch networks of the Big 4 banks to push their product to consumers, thus increasing competition.
While I see the need for some level of reform within the mortgage broking industry, I would argue that there is a need to ensure that it does not adversely impact the role of the mortgage broking industry as a whole and thus further cement the market share of the major banks.
Perhaps before we start down the road of a best interests duty consideration should be given to requiring independent ownership of mortgage aggregators. It would be a more radical step in Australia but would go some lengths to restricting the major banks role in pushing their products via mortgage broking channels.