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The interim report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been released, outlining a swathe of changes for the mortgage industry that will be of interest to real estate professionals.
The report covers the “policy related issues” arising from the first four rounds of public hearings, which covered consumer lending, financial advice, SME loans and the experiences of regional and remote communities with financial services entities.
It outlined that intermediaries play “important roles in the home loan industry” but raised many questions relating to who brokers act for, as well as broker remuneration.
Remuneration structure for brokers called into question
The royal commission said that there was “no reason to doubt” the findings of ASIC’s Review of Mortgage Broker Remuneration, not was there any reason “to doubt that value-based upfront and trail commissions to third parties contribute to those outcomes”.
The commission has rebuffed “the assertions by mortgage brokerages Aussie Home Loans and Smartline Home Loans Pty Ltd, that the present remuneration structures for intermediaries are not shown to lead to any consequence that calls for alteration of the system are not to be accepted.”
It continued: “What is plain, however, is that value- and volume-based remuneration for intermediaries in the home loan industry has been an important contributor to misconduct and conduct falling short of community standards and expectations and poor customer outcomes”.
The report goes on to say that the Combined Industry Forum package of reforms are “limited” and - most concerningly - goes on to suggest that trail could be an issue.
“While the perverse incentives created by volume-based commissions, which reward brokers for the number of customers placed with a lender, are to be removed, upfront and trail commissions based on loan value remain.
"While basing those commissions on funds drawn down removes an incentive for brokers procuring a loan larger than the borrower will use, the change does not deal with the more basic problem of borrowers being encouraged to borrow more than they need.”
It added: “Value-based remuneration conflicts directly with customers’ interests.”
Who does a broker act for?
The commission also voiced concern that “the exact role each form of intermediary fulfils at various stages of a home loan transaction is not always clear”.
Indeed, the report states that there is “no simple legal answer” for explaining whom an intermediary – such as a broker – acts for.
The commission report suggests that:
“in most cases, even if an intending borrower believes or expects the intermediary to be acting in the interests of the borrower, the intermediary owes no general duty to the borrower to seek out the best and most appropriate deal for the borrower”;
"Very often, the relationship between broker and would-be borrower will either be obscure or a relationship in which the broker owes the borrower no duty larger than not to negotiate an unsuitable loan”;
“There is no doubt that in the eyes of at least some lenders, the broker’s task is to sell that lender’s products.”
More to come.
The public is invited to respond to Commissioner Hayne’s interim report from the financial services royal commission, which includes his take on the first four rounds of hearings.
Members of the public will be allowed to make online submissions to the commission about past conduct until 5pm today (28 September), after which time the commission is expected to “shift its attention from past experiences to proposals on what should be done in response to the issues raised or conduct uncovered within the banking, superannuation and financial services industry.”
The commission will release a final report, which will include the topics of the fifth, sixth and seventh round of hearings (focusing on superannuation, insurance and “policy questions arising from the first six rounds”, respectively) by 1 February 2019.
The seventh round of hearings, which focus on policy questions arising from the first six rounds, are scheduled to begin in Sydney on 19 November and will then move to Melbourne from 25 November.
Details about topics and case studies to be heard will be published prior to the hearings commencing.
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