Productivity Commission Update

March 26th, 2018

Connective submission in response to the draft report prepared by the Productivity Commission in relation to ‘Competition in the Australian Financial System’ dated January 2018. 

Background

The Productivity Commission is the Australian Government’s principal review and advisory body on microeconomic policy, regulation and a range of other social and environmental issues.  On 7 February 2018, they issued their draft report on Competition in the Australian Financial System (the PC Report) with the final report due on 1 July 2018.  A section of the report looked at the residential home loan market, with many of its draft recommendations causing concern amongst the broker community.

We made our submission in response to the report last week (which can be accessed in full from Productivity Commission Submission. Below are some of the key points from our submission.

Key points from our submission

• We noted that ASIC had already conducted a substantial investigation into the mortgage broking industry last year. In response to ASIC’s review and the Sedgwick Report on banking remuneration, the Combined Industry Forum (CIF) was formed to lift standards in the industry generally.  Many of the points raised in the Productivity Commission Report are already adequately and more appropriately addressed by the CIF’s proposed reforms.  In our opinion, nothing new has arisen to change this. For more information, watch our webinar on the Combined Industry Forum outcomes
• We reiterated that ASIC has expressly recognised the very important role mortgage brokers play in the home loan market, particularly their role in fostering competition and creating downward pressure on home loan pricing. We cautioned the Productivity Commission about making recommendations that may negatively impact the feasibility of mortgage brokers to operate, as this would have the opposite effect of what the PC Report is trying to achieve.
• Draft Finding – brokers do not consistently get home loan lower Interest rates than if the consumer went direct to lender.

We rejected this finding on the basis that it did not appreciate that consumers who use brokers are generally different to those that go direct to branch (and therefore not comparing like for like).  Also, pricing does not recognise all the other reasons why consumers use brokers (such as advice and assistance). Finally, the impact of brokers on interest rates needs to be considered more broadly, with all home loan consumers benefitting from the greater competition brokers facilitate.

• Draft Finding – are brokers really a cheaper distribution channel than branches?

We were disappointed that the PC Report was unable to fully recognise the value of mortgage brokers to lenders due to the inability of certain lenders to assess the costs and benefits of using brokers rather than branches.  Without brokers, smaller lenders would be unable to compete and certain consumer groups (i.e. those based in the country) may not be adequately serviced.   We were also disappointed that there was a view that mortgage broker remuneration was “high” and equating it to simple financial advice.  There seemed to be no attempt to appreciate the time and effort brokers expend to achieve settlement for a customer.

• Draft Recommendation – duty of care obligations for lender-owned aggregators

The PC Report recommends that aggregators who are wholly owned by banks, and their brokers, be subject to an obligation to act in the customer’s best interests.  Although we would not be subject to this, we still strongly object to this recommendation on the basis that it was not appropriate and introduced subjectivity into expectations on brokers.  We pointed to the CIF’s definition of “good consumer outcome” as the appropriate standard:

“The customer has obtained a loan which is appropriate (in terms of size and structure), if affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”

• Information Request – should consumers pay their broker fees for service?

We strongly recommended leaving the commission structure as is (subject to the one recommendation by the CIF around upfront commissions being payable on net utilised amount).  A consumer ‘pay fee for service’ structure would severely damage the mortgage broker industry and ultimately hurt consumers.

• Draft Recommendation – Mortgage Broker disclosure requirements

The PC Report recommended greater disclosure requirements by all members of the industry.  Connective is supportive of more disclosure provided that information is relevant and useful to the consumer.  We referenced the CIF’s proposals on this topic.

• Draft Finding – Mortgage Broker commission structures weaken consumer switching

We strongly disagreed with the finding that trail commissions and commission clawbacks weaken consumers switching home loans for better terms.  We felt the Productivity Commission totally missed the mark on this and misunderstood the purpose of trail commission and clawbacks in making this finding.

• Information request– Is there a rationale for the structure of mortgage broker commissions?

The Productivity Commission sought views as to what should be done with trail commission that increases over the life of the loan, and commission clawbacks. The focus was from the perspective of facilitating consumer switching to increase competition (they had separately found that long term customers with one lender became more likely to be paying more for products than new customers to that lender).

Our submission argued for the retention of trail commission.  The fact a lender chooses to increase the size of trail commission over the life of the loan is a commercial decision of each lender to make.  Regarding clawbacks, we supported their removal on the basis that they were unfair to brokers who were being penalised for a circumstance outside of their control.

We will monitor what comes out in the Productivity Commission’s final report and update you accordingly.  We will continue to speak strongly in support of brokers generally and ensure that people appreciate the value mortgage brokers give to their individual customers, as well as all home loan customers generally, due to the increased competition they facilitate.

As always, if you have any comments or wish to discuss any topic further, please do not hesitate to contact me, Daniel Oh, Connective Group Legal Counsel at daniel.oh@connective.com.au

To read the full Connective Submission to the Productivity Commission, please click below.

Connective Submission to the Productivity Commission

Productivity Commission Submission