Anna Dooland is a financial counsellor at Diversitat who provides assistance to consumers with financial problems, including in cases where consumers have got into trouble as the result of poor and possibly illegal advice from finance and mortgage brokers. In this guest opinion piece for CFA she reflects on the number of problems she sees caused by conflicted remuneration in the broking industry. Anna is a former member of the CFA Executive.
I was remarking to a colleague a few weeks back that my longest running and most complex cases always seem to involve brokers. I have a particular case that has been running for over three years and is only just wrapping up. In this matter, a broker completed some documents with knowingly incorrect information and the resulting loan was so inappropriate that the disabled couple nearly lost their house and all its equity. In the end, it cost the financier a figure approaching $100,000 in the interest and fees that needed to be waived when the loan was ‘fixed’ to make it fair and appropriate. There will be ongoing losses for the couple as a result of the actions of the broker.
In another matter, a broker instructed a customer to register a business name and take out a company loan instead of the consumer mortgage that she had requested. He made $15,000 out of that loan, and his associates also received substantial funds. In this case, the consumer is going to lose her house.
The third case is quite similar: a couple consolidated their various small debts into a mortgage. The broker recommended they take out substantially more than they needed (it turned out his commission was a percentage of the balance lent), and by the time I had the couple sitting in front of me, the matter had already been before the courts and their house was already up for repossession.
This is just a selection of my open cases. I can quote a large number of unfortunate situations that I’ve seen in the past, and they all contain basically the same feature: a broker puts a pen in the consumer’s hand and dismisses their concerns about the incorrect information on their applications by saying, “Don’t worry, this is just how the industry works. Everyone does it.”
And herein lies the problem.
Many consumers get shut down when they seek advice about the problem of trying to deal with a loan where they could be accused of being complicit in providing false information to the lender.
I rarely have much luck with the two industry Ombudsmen on this topic, either. Only one of my cases against a broker has ever reached a favourable conclusion, and this was after the two Ombudsmen had finished arguing with each other about who was stuck investigating the case, as the broker was a member of one and the financier of the other. In the end it was the financier who ended up footing the bill for the dodgy loan, not the broker.
I’m yet to meet one person who doesn’t partially blame themselves for trusting the broker – and that’s why I think the complaint levels are so low
In 2012-13 the Financial Ombudsman Service (FOS) received 110 credit disputes against brokers, which represents one per cent of disputes received relating to consumer credit, or 0.34 per cent of all complaints[1]. The news is slightly better from the Credit Ombudsman Service Limited (COSL), who in the same period took 337 complaints against brokers, or nine per cent of all complaints received[2]. Information on how many of these judgements fell in favour of consumers is not publicly available.
ASIC has similarly small figures, having jailed only one broker since 2010 and banned seven from operating.
Considering that figures from September 2013 show that 46.6 per cent of home loans are facilitated by a broker[3], and given the alarming regularity with which I see suspicious loans that have been brokered, I know these statistics aren’t telling the full story.
I think the crux of this contradiction can be traced back to when the loan documents are placed in front of the consumer. The consumer is often either completely reliant on the broker to fill them out, or depends on the broker for direction on how to answer questions. The broker has the illusion of being an advocate, as well, because the consumer knows they want a loan and the broker will be acting on their behalf to secure one.
There is a natural power imbalance in this situation, and that’s just for your average consumer. When you factor in other consumer disadvantages such as a low level of education, English as a second language or simple financial illiteracy, the power balance becomes more pronounced. So, when the broker instructs the client to put incorrect information onto the application, the consumer will ignore their misgivings, because this knowledgeable person who seems to be their advocate is telling them it’s normal.
Every single client I’ve spoken to who’s been in this situation and is suffering financially as a result of it always tells me they feel so stupid for having listened. I’m yet to meet one person who doesn’t partially blame themselves for trusting the broker – and that’s why I think the complaint levels are so low to dispute resolution and regulatory bodies. Instead of blaming the broker for taking advantage of that power imbalance, they’re blaming themselves for listening and doing as instructed. Meanwhile, the brokers get off scot-free.
Fortunately for consumers, an amendment to the National Consumer Credit Protection Act 2009 (Cth) recently came into effect on March 1 2013 which may go some distance to address the problem. Section 180A of the Act adds another right for consumers to take action against brokers (and other intermediaries) who act poorly. Of specific interest are the sections which deal with the broker manipulating or coercing a consumer into agreements which they otherwise would not have signed.
Despite this new piece of legislation being passed, though, I still remain rather sceptical about whether or not this will help solve this abuse of power.
This is because there is already plenty of legislation that applies to brokers in one way or another that deals with deceptive or misleading conduct that has so far not been helpful in combating the problem. Consumers who feel guilty and blame themselves are unlikely to go seeking ways to redress their broker, so even if the laws exist the problem is unlikely to see daylight in this manner.
Additionally, this new legislation only applies to loans that fall under the umbrella of the National Consumer Credit Protection Act 2009 which means that brokers that manage to convince consumers to apply for business loans in business names are still not covered by it.
I do think that the new amendment will be useful for consumers with consumer loans who do seek to redress the misleading conduct, but I don’t think the law goes far enough.
If brokers are incentivised by up-front or trailing commissions for selling loans, there’s far too much temptation
I would like to see all brokers having to provide a one-page sheet of information with every product they provide that outlines consumer’s rights on this issue. I also think that needing to provide a sheet of paper that says something along the lines of “Have I asked you to sign something you feel uncomfortable signing?” or “Have I told you to provide incorrect information for the purposes of getting access to this product?” with ASICs and the relevant Ombudsman’s details would stop many dodgy brokers in their tracks. However, this can’t be the only fix. The most vulnerable consumers and the ones that most need the protection are also the least likely to read any documents they are given.
Perhaps another way to tackle the issue would be to strengthen the capacity for poor loans to be pinned to the lender, regardless of who provided the brokerage. This is occasionally possible anyway, and where it is it can be an effective way of dealing with a bad lending decision. However, it still doesn’t address the fact that the consumer needs to be seeking the redress in the first place.
Although it doesn’t go any distance to help consumers who already have inappropriate loans, addressing the remuneration structure for brokers could be an effective way of discouraging bad practice. If brokers are incentivised by up-front and/or trailing commissions for selling loans, there’s far too much temptation to take advantage of someone who doesn’t fully understand what they’re entering in to. Unfortunately I can’t imagine legislation to address the manner in which brokers are paid would be very popular. I very much doubt we are likely to see changes to the remuneration of brokers in the near future.
This is a difficult problem and there are no easy answers. It is likely more than one of these suggestions will need to be implemented to fully address this issue. Perhaps recent additions and amendments to laws will go some way to combating the problem, but we’ll see. Until the problem is fully addressed, there will be a steady flow of consumers with dodgy loans coming to financial counsellors as they lose their family home.
[1] http://www.fos.org.au/custom/files/docs/20122013_annual_review.pdf
[2] http://www.cosl.com.au/publications/annual-report-on-operations/annual-report-on-operations-snapshot-20131/
[3] https://www.mfaa.com.au/default.asp?artid=3088
Photo credits:
monkeyc.net (top)
NickiMM (middle & bottom)