What’s happening at the Royal Commission, and how it may affect you

March 22nd, 2018

There has been plenty of press covering the current round of Royal Commission hearings, focused on consumer lending. Unfortunately, mortgage brokers were on the receiving end of much scrutiny last week, and the follow up articles in mainstream media did not cast our industry favorably.

This article shares Daniel Oh, our Group Legal Counsel’s, thoughts on what has transpired so far at the Royal Commission, and what it could possibly mean for mortgage brokers in the future.

Areas discussed which impact mortgage brokers – week of 13 March 2018

Some of the topics discussed during the Royal Commission’s first week of public hearings were:

• Customer identified living expenses, including the use of HEM, and the processes for verifying these
• CBA’s accreditation process and their rationale for disaccrediting brokers who had not written a loan with CBA within a period of time.
• The commission structure for mortgage brokers and whether it was justified that upfronts be linked to size of the loan. Trail commissions and whether they were justified was also discussed.
• CBA broker clubs and different tiers of service.
• Detailed examination of the misconduct of certain former Aussie Home Loans (AHL) brokers and how AHL handled these situations (and how, in the Royal Commission’s opinion, AHL should have handled these situations).

What’s happening next with the Royal Commission?

Hearings will continue over the next couple of months and the focus will shift away from mortgage brokers to other parts of the banking and superannuation universe.

What we do know is that the Governor-General expects an interim report by 30 September 2018 with the final report no later than 1 February 2019. Connective will continue to monitor proceedings closely and will consult with you before submitting any response to the interim and final reports.

With an election year looming, it’s uncertain as to how the political parties will adopt or champion the final report’s recommendations and what changes they will seek to implement if elected.

Areas I expect to see change or at least some evolution

Some of the areas explored in the Royal Commission have already been considered extensively, whether it be by the Productivity Commission, Sedgwick or ASIC.

From my perspective, I expect change in the following areas:

An expectation that your primary focus be on your customers

For our industry to flourish, it is critical that customers trust the major stakeholders in the industry and have confidence that these stakeholders, mortgage brokers included, will do the right thing by them. Unfortunately, based on recent media coverage, that trust and confidence has been severely weakened, if not lost.

ASIC concluded in the Broker Remuneration Report that the legislative standard of “not unsuitable” was not enough, introducing the concept of “good consumer outcome” as the measuring stick for broker performance. This concept was progressed by the Combined Industry Forum and a definition was agreed (one, we are comfortable with from a broker’s perspective).

Subsequently, the recent draft Productivity Commission’s report has recommended that brokers of aggregators owned by banks be required to act in the “best interests” of the customer. Although Connective’s brokers are not subject to this recommendation, we have strongly objected to this in our submission as it would set a near impossible bar for brokers to meet.

Regardless of where this comes out, what is apparent to me is that the public and government will expect a general lifting of standards with a more customer focused approach from mortgage brokers, even where it could be to the detriment of that mortgage broker. I know that the greater majority of our brokers already perform at or above these suggested standards but as an industry, we must be seen to be proactively willing to improve generally to re-earn this trust.

Too many reports have pointed, rightfully or wrongfully, to the conflicts in how the industry’s commissions are structured for us to ignore the signs.  In short, the customer’s needs must be at the forefront of your mind as and when you provide credit assistance to your clients.

Living expenses and how they are verified

You would have received an email from our director, Mark Haron, last week on this topic.  Everyone is heavily focused on this topic currently and it’s critical that you ensure the figure you state in the loan applications you facilitate are accurate and verified with the client.

In hearings earlier this week, ANZ failure to follow processes to verify customers’ financial situation was painfully examined and whether that amounted to a failure to comply with response lending obligations. Imagine if the Royal Commission examined your processes around living expenses.  Would they be defensible in this current environment?

Our internal data for 2018 indicate that loan applications are still being submitted by Connective brokers with stated living expenses at or below HEM.  This can no longer be a mechanical process for you to ensure the loan gets approved.  It is an obligation of your function as a mortgage broker. ASIC themselves have said that their default position is expenses are assumed to be understated if below HEM unless there is sufficient evidence to prove otherwise.

We are not saying these applications are wrong, just that you need to ensure that you have done the work to verify and have the necessary evidence to support this figure.  If the figure is at or below HEM, expect greater scrutiny.

Soft dollar benefits are dead

This was already covered in the CIF’s proposed reforms but the spotlight on CBA’s broker clubs is certainly, in my view, the last nail in the coffin for these and other similar arrangements.

Further debate regarding commission structure

At one point, Commissioner Hayne asked the question as to, if all things were otherwise equal, whether a broker did more work on a larger loan than on one with a smaller amount to justify receiving a greater upfront commission.

The Productivity Commission’s report has separately queried whether consumers should pay brokers rather than the lender, or a flat fee be charged across the board. Connective hopes that the CIF’s recommendation that upfront be paid on the net utilized amount is a sufficient concession for legislators and regulators to leave the commission structure otherwise untouched, especially when coupled with CIF’s other proposed reforms.  In any event, the debate continues on this topic.

Brokers need to “earn” their trail commissions

The concept of trail commission, and whether they should actually be paid, was also a topic of conversation. Similarly, the Productivity Commission queried whether they should be abolished.

We will continue to voice our strong objections to any removal of trail commissions. However, as a minimum, there will be more scrutiny as to what you do post settlement to justify continued receipt of this trail commission. Our position on the topic is that you should speak or meet your existing clients at least once a year, if not more, to ensure that client’s needs continue to be met.

Lenders’ expectations of brokers to increase, tolerance to decrease

Based on the questioning of bank representatives at the Royal Commission as to how they responded to situations of broker misconduct, it was clear that the banks’ approach at times was insufficient and more focused on self-preservation than the consumer. I can only envisage that lenders will react more rapidly (and forcefully) towards alleged misconduct by mortgage brokers as a response to these findings. We have already seen a large spike in the number of broker investigations initiated by our lender partners as compared to this time last year and I only expect this to grow as lenders will not want to be seen as not acting on suspicious circumstances.

Our position is that due process must always be followed, and accusations of improper behavior fully investigated before coming to a determination. Unfortunately, I see lenders becoming less tolerant and I expect to see more suspensions/terminations of accreditations, as well as a greater willingness by all in the industry to notify ASIC and MFAA/FBAA earlier in the investigation process. The onus is on you to protect your business and reputation when dealing with your clients through better record keeping.

Lenders will expect more of Connective

We have already seen increased requests from lenders for various audits and attestations regarding our brokers. These lender requests, and their expectations of how we supervise and monitor our brokers, are only increasing and as such, we will be expecting the same from our brokers. We appreciate the regulatory burden on you is already large but unfortunately, in light of what is happening generally, this will only increase over time.

We understand that many of you are concerned about the sustained focus on our industry, and that the misconduct of a very small group of brokers is tainting our reputation and hurting the goodwill many of you have spent years building.

At Connective, we are 100% committed to supporting you and keeping you informed and on top of any changes that may come. We are investing in ongoing coaching and training, increased Compliance Support Mangers, as well as ensuring our compliance procedures and processes remain as efficient, relevant and transparent as possible. We will work together with you, so that you can do what you do best – focus on helping your clients achieve great outcomes.

We will continue to keep you updated as to what is happening at the Royal Commission (to the extent relevant to our industry) as well as any other regulatory developments.

If you have any questions, please contact Daniel Oh, Connective Group Legal Counsel, on 0418 269 888 or daniel.oh@connective.com.au, or email compliance@connective.com.au.