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Major brokerage calls for remuneration reform

By Jared Hodge

One of the nation’s largest brokerages has called for a number of reforms to broker commissions and clawbacks and believes that a registry for “bad brokers” should also be introduced.

Speaking at a media lunch in Sydney on 23 April, Loan Market executive chairman Sam White revealed his thoughts on the royal commission, explaining that what started out as an inquiry into the banks has “dramatically shifted to the broking industry”.

Acknowledging that the reputation of the third-party channel has “taken a beating”, Mr White stressed that the industry must evolve and suggested seven ideas for reform.

“The reforms are considered and rooted in a desire to do better by our customers and increase competition, not to appease the agenda of the big four,” the executive chairman said.

The first of these proposals would see a move to an industry standard upfront commission percentage across all lender products.

“This would put to rest any misconception that brokers only put their customers into the higher paying products,” Mr White said. “This is similar to the successful changes that were made to the life insurance industry.”

In addition to the standardisation of upfront commissions, Loan Market is calling for clawbacks to also be standardised.

“There is a myriad of differing approaches by lenders to how clawbacks are calculated, which is why we are calling for a clear industry standard for clawbacks,” Mr White said.

The proposed remuneration reform comes after the Productivity Commission suggested commissions could be scrapped in favour of a fee-for-service model.

Like many of its industry peers, Loan Market believes that a fee-for-service model would ultimately weaken competition and lead to poorer consumer outcomes, meaning fewer consumers will use a broker.

“In turn, that means fewer customers will get access to smaller lenders,” Mr White said. “Fewer brokers means less pressure on banks to remain competitive. It would mean a massive win for the big four.”

Loan Market also believes that broker trail commissions — which Mr White noted are currently around 20 per cent of the net margin generated by a mortgage over a five-year period — should remain part of a broker’s remuneration. However, the executive suggested that more stringent processes should be introduced to ensure brokers provide ongoing service to clients for the trail payments they receive.

“Instead of reacting to knee-jerk calls to ban trail, we encourage policymakers to work with industry bodies, regulators and licensees to set standards for regular client reviews to ensure customers can get ongoing service from their broker for no additional cost to themselves,” Mr White said.

“In the future, we see our brokers playing a critical role in assisting clients with budgeting and cash flow as part of the annual review, which will help them to analyse their current spending patterns and put them in a position where they can pay down their loans in a more efficient manner.”

The Loan Market chairman also called for greater clarity around broker obligations as stated in the NCCP and believes that greater steps can be taken towards greater professionalism within the broader industry.

Mr White proposed the introduction of a “bad brokers registry list” to remove brokers who act outside industry standards or commit fraudulent activity immediately from the industry.

“This would be managed by the industry body,” the chairman said.

One of the biggest topics probed by the royal commission thus far has been the verification of customer income and expenses. Major banks have now started tightening their lending criteria and imposing stricter guidelines as to how brokers should receive this information from their customers.

However, according to Mr White, there is no formal industry policy setting around these assessments.

“That is why regulators, lenders and broker groups should set a common standard for assessment and presentation of income and expenditure details that must be communicated from the mortgage broker to the lender,” Mr White said.

“This will set a clear expectation on the work that is required by a broker before it is presented to a lender.”

Source: https://www.theadviser.com.au/breaking-news/37676-major-brokerage-calls-for-remuneration-reform

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