The MFAA CEO on why he believes the Combined Industry Forum's changes to commissions and regulation will pay off for brokers
Despite a challenging year, I believe the mortgage broking industry came of age during 2017.
With all the changes and disruption we’ve already seen over the past year – regulatory reviews, a royal commission, new prudential measures and more – it would be tempting to think it’s finally over.
ASIC’s remuneration review recognised the value that brokers provide but identified six key areas that required change. We must take real action to address these or be regulated.
In response to the ASIC review, the Combined Industry Forum report presented a package of reforms aimed at further improving customer outcomes, but critically, it was also focused on preserving the value brokers bring to the mortgage market by driving competition and providing access to credit.
The reforms address ASIC’s six key recommendations, but it is simpler to think of them in two groups – remuneration practices and governance.
The CIF’s proposals sought to address potential “product strategy conflicts” and “lender choice conflicts” – which were highlighted by ASIC as priorities for reform – while still rewarding brokers for the economic value they produce.
A key priority for ASIC was to address incentives that may encourage brokers to recommend larger loans with large initial offset balances.
Following much consultation, the reforms proposed payment of upfront commission on funds drawn down and utilised net of offset, with trail commissions paid on amortised loans net of offset, and clawback unchanged. The CIF report also recommended volume-based payments be ceased from 31 December 2017.
On ‘soft dollar’, the CIF has recommended broker clubs be transformed into tiered-servicing arrangements that deliver better service for the customer; the removal of volume hurdles; introducing monetary caps on lender entertainment; enhanced record-keeping and disclosure requirements; reforms to conferences; and a strong focus on broker education and competency.
We understand that these reforms may impact some brokers, but they were specifically called out by ASIC and have been a key source of criticism from stakeholders.
While these reforms will have a measurable and positive impact on the industry, it is in governance and transparency that the real work – and long-term benefits – will begin in 2018.
The industry will provide clearer disclosure of ownership structures and a public reporting regime to provide greater transparency on lender coverage, breadth of choice and the weighted average commission rate earned by aggregators, to assist consumers to make more informed decisions. Both these reforms will be consumer-tested to ensure this additional compliance does create a consumer benefit.
Finally, the CIF has proposed a data-driven, self-correcting and continuously improving governance framework – the centrepiece of the reform package.
This will be the foundation of a ‘mortgage broking industry code’ that will be applied across the value chain. The governance framework – and the code – will be underpinned by data analysis of key risk indicators for potential poor consumer outcomes, to allow aggregators and brokers to flag outliers for further review against the industry average.
The governance framework will also see greater standardisation in compliance; unique identifiers and improved reference checking; data-based monitoring; customer feedback and shadow shopping; remedial training and education; and an ongoing assessment of remuneration structures to ensure they remain fit for purpose.
This year is critical. If we get it wrong, our industry is at risk. If we implement these reforms successfully, we would soon expect to see improving professional standards and further strengthening of consumer trust and confidence – and brokers’ market share at more than 60%.
The opportunity to self-regulate is incredibly empowering. We are using our collective industry experience to find the right solutions and build consumer trust. I hope brokers, aggregators and lenders will continue to lend their voices and their expertise to ensure our reforms promote better consumer outcomes for the long-term benefit of our entire industry.
Mike Felton has been the CEO of the MFAA since late 2016 and a founding member of the Combined Industry Forum. He was previously COO at Pepper Asset Finance and has also worked at RMB Australian and the Standard Bank of South Africa.