CFA members CHOICE, Consumer Action Law Centre and Financial Rights Legal Centre are calling on the federal government to act on conflicted remuneration in the mortgage market following an ASIC report that found widespread conflicts of interest for brokers and bank staff have led to an aggressive sales culture and poor outcomes for borrowers.
Quotes attributable to Erin Turner, Head of Campaigns & Policy at CHOICE:
“This report clearly shows that the banking system is rigged to send more loans to the big banks and to get consumers to borrow more, putting them under financial stress.
“With the market riddled with harmful behind-the-scenes payments and benefits that lead to aggressive home loan sales, it’s time the federal government took urgent action to protect consumers.
“The sad fact is incentives paid to brokers result in consumers being stuck with bigger loans as brokers seek higher commissions. With brokers arranging 54.3% of all home loans and interest rate rises likely in the near future, this creates an environment where broker commission structures are increasing risk across our housing market.”
Quotes attributable to Katherine Temple, Senior Policy Officer at Consumer Action:
“Getting a home loan is perhaps the most important financial decision you’ll ever make. Lenders paying hidden commissions to brokers results in people borrowing more and paying more interest.
“The federal government must act on commissions and conflicted payments. Although the report recommends the Australian Bankers Association fix the mess of commissions and backroom deals, it’s not just banks involved, so we need a more effective industry-wide response.
“It’s also deeply concerning that brokers and bank staff are incentivised to upsell products such as poor-value consumer credit insurance, financial advice and credit cards. This ‘would you like fries with that’ tactic means that people end up with products and services that benefit the industry, not the borrower.”
Quotes attributable to Kat Lane, Principal Solicitor at Financial Rights Legal Centre:
“There is a giant gap between what consumers expect from brokers and what is actually delivered. 58% of all people who had used or intend to use a broker thought that they would get them a better deal than the banks. The report clearly shows brokers do not get you better priced loans.”
“Loans arranged by brokers are 25% more likely to go into arrears. This shows there is a major issue with the affordability of loans made through this channel.
“The National Credit Law left unfinished business in relation to mortgage brokers. It’s time to bring credit in line with the rest of financial services and address both conflicted remuneration and brokers duties to their customers in the law”
Summary of key findings:
- Brokers will earn more if they recommend products such as interest-only loans that maximise the amount the customer can borrow.
- Loans provided through brokers were larger than those from online or lender channels.
- Brokers are incentivised to recommend loans that may not be the best option for the customer because they will get a higher commission. There was a 0.68% difference between commissions with one aggregator – that could mean a broker receives up to $3400 more on a $500,000 loan.
- Some commission structures encourage risky lending. One lender paid higher commissions for loans with higher credit risks which attracted higher interest rates.
- 86% of people with experience or intention to use a broker thought that brokers would put customer needs first (27%) or some of the time (59%). 36% of people with experience or intention to use a broker mistakenly believe that brokers get paid the same regardless of the loan.
Soft dollar payments
- Bonus payments and soft dollar benefits are extremely common. Bonus payments from lenders to aggregators ranged between less than $1000 to up to $1.5 million.
- Soft dollar benefits such as broker clubs that are structured like frequent flyer systems lead to a small number of brokers writing a high percentage of loans for specific lenders. In one case, 11 members of a lender’s highest broker club tier (out of 14,000 brokers) wrote $1 billion worth of loans in 2015, or 3% of all loans for that lender.
Banking on incentive payments
- The Commonwealth Bank received 37.3% of all loans through Aussie Home Loans, where it owns 80% of the business, but Commonwealth Bank’s overall market share is 20.9%.
- Bank staff can be paid an extraordinary amount to sell loans. ASIC found bonuses over $300,000 and bonuses that could be over 200% of a base salary.