CBA’s Matt Comyn was the first major bank CEO to appear before the royal commission during the seventh round of hearings on Monday (19 November). His testimony revealed some shocking new insights into how he and the major bank were planning to completely overhaul broker remuneration, but why they couldn’t pull it off in the end.
Here are the four key things you need to know.
1. Comyn pushed for flat fee remuneration model
In late 2016, while head of CBA’s retail bank, Comyn proposed to then-CEO Ian Narev and the executive committee that CBA adopt a flat fee model, as was rolled out in the Netherlands. Comyn admitted that he thought the flat fee model paid by the customer would lead to better customer outcomes than the current model. Although he also acknowledged that the bank “could gain from any interruption in the mortgage broker model”.
“We are contemplating publicly advocating for a FOFA approach to mortgages where the customer would pay for advice,” he wrote in an email in 2016.
In order to retain competition if this model were adopted, he said the bank would also have to charge a fee for service as well so there was no “unfair advantage”.
CBA’s executive committee was so interested in this proposition that Comyn flew to the UK to meet with the Dutch regulator who had overseen those changes in the Netherlands.
Comyn’s research determined that while there was a lot of resistance to that model being adopted in the Netherlands, the broking industry returned to equilibrium and brokers’ market share proved able to rebound.
2. But CBA didn’t go ahead with it…
By February 2017, in its submission to Sedgwick, CBA started exploring the idea of a flat fee model paid for by the lender instead. It was thought that this might be a better approach to remuneration to “ensure that small businesses who are broking and existing in the industry are not adversely impacted from a reduction to their income”.
Comyn said the bank was struggling over how to implement this model. “We felt there was a genuine first-mover disadvantage,” he told the royal commission. “We didn’t think it would be replicated, absent regulatory intervention.”
In the end, CBA decided that if it was the only bank to adopt this model, that wouldn’t improve customer outcomes and it would instead just reduce loan flows through brokers to CBA.
“There would be a commercial detriment to us and no accompanying improvement to customer outcomes,” he said.
3. “You had better be sure,” Narev tells Comyn
Before the ASIC review into mortgage broker remuneration was released, Comyn wrote to Narev saying that ASIC was aware that if it went ahead and recommended a flat fee model, CBA would support the move. Comyn told the royal commission that he was hoping ASIC would recommend a fee-model commission structure.
Narev responded in an email: “As you know, history is littered with banks, even big ones, who try to take on the broker channel and lose. I agree that it looks like we are on the cusp of a genuine discontinuity. We also need to understand that the prisoner’s dilemma still applies here.
“So if you are going to try and lead the pack to the top right quadrant, you had better be sure. It is clear that NAB and ANZ have a heavy reliance on brokers, so if they are smart they could see this as a step-out opportunity to turn that channel in their favour.”
4. Comyn was set on introducing flat fee by February 2018
After the release of both the ASIC remuneration review and the Sedgwick report, Comyn still thought there was an opportunity for CBA to proceed with the flat fee reform.
He told Narev in April 2017 that he was proposing to announce the change “next week” for it to come into effect in February 2018.
The model proposed delinking the value of a loan from the broker commission and replacing it with a flat fee, conditional on satisfactory customer outcomes. It also proposed introducing a transition payment to existing high quality brokers to protect them in case other lenders didn’t follow suit.
“The effect of these arrangements will be to reduce the expected broker revenue on an average loan from $6,627 to $2,310,” he said in the email. If the market moved with CBA on that reform, he told Narev that there would be a cumulative savings of $197m.
Once again, CBA scrapped the idea out of fear that no other bank would be compelled to follow unless there was regulatory action.
5. Comyn believes brokers provide a valuable service
Comyn said he understands why customers go to brokers and agreed that competition in the home loan market is a good thing for customers.
“[Brokers] are seen as providing access to someone that’s independent of the financial institutions, they’re someone who’s providing choice.”
Brokers are also seen as making the process easier for customers, and are perceived as being able to provide them with a better price, he said.
“I’ve met some excellent mortgage brokers who work exceptionally hard, provide a very high quality of service and deliver good outcomes,” he said.
More to come...