Connective's executive director on the big changes that will shape 2018, and what aggregators need to do to step up their game
Aggregators have for years played an integral behind-the-scenes role in the home loan process, providing brokers with technological and compliance support, training and education, accreditation and commission, yet most consumers are unaware of their existence.
It looks like that could change. With the publication of the Combined Industry Forum’s reforms for a stronger governance and oversight framework, ownership disclosures and data collection, and the Productivity Commission looking at bank-owned aggregators, the middle agent between brokers and banks will be expected to become more transparent and accountable to the public.
Mark Haron, director of Connective and the CIF’s deputy chair, is one of the aggregator heads driving that forward.
In an interview with MPA, Haron gives his insights on the big changes that will shape the year ahead and what aggregators need to do to improve industry standards.
The spotlight is on
The CIF’s reforms were intended to deal with the concerns expressed by ASIC in its broker remuneration review in the least intrusive and destabilising way possible for the industry. But if brokers think they can breathe a sigh of relief with self-regulation in motion, think again.
The Productivity Commission and the banking royal commission have raised the level of scrutiny of the mortgage broking sector to new heights, with potentially industry-altering proposals and information requests underway.
The worst-case scenario is not far-fetched: it could recommend removing commissions entirely. At the last public hearing on 6 March, Productivity Commission chairman Peter Harris said a fixed broker fee was perhaps a better proposition than the current commission structure.
Haron believes there could be negative consequences of putting the financial burden on consumers. “If we remove broking commissions and a significant number of brokers leave the market, we’re not going to be in a position to deliver on those improved customer outcomes, particularly to a whole segment of customers who can’t afford the advice.”
While the two commissions are just ramping up their inquiries, the CIF will plow ahead with its reforms. This year it plans to implement changes to commission structures based on the facility utilised net of offset; change tiered-service models and the eligibility of non-monetary benefits; introduce the new ownership disclosure and public reporting framework; and commence work on an industry code. The governance framework is slated to be completed by 2020.
Haron says the CIF’s progress won’t be delayed as a result of the ongoing commissions. But he does say that, depending on the outcome, the CIF reforms may have to be revisited and tweaked down the track.
“We’re very confident that what we [the CIF] have proposed are correct measures and when implemented they will make the changes and the improvements, and we think that the regulators and the government will look back and say, ‘Yes, this is what we wanted to see’,” Haron says.
The fact that the CIF was formed last year and worked its way through the ASIC and Sedgwick reports, coming up with a balanced set of reforms, should be reassuring to brokers, he adds. “Having that forum in place and functioning very well puts the industry in a good position to respond collectively to the Productivity Commission and to what comes out of the royal commission."
At the time of writing, the CIF had not made a submission to the Productivity Commission but was reviewing whether to submit one.
Best Interest duty
The commission has recommended that brokers should have a legal responsibility to act in their clients’ best interests. This would be imposed by ASIC on aggregators owned by lenders and would also apply to the brokers operating under them.
Based on that preliminary outline, Connective would be included. Macquarie Bank has a 25% stake in the aggregator something Haron says they are completely transparent about and which doesn’t influence their brokers or where their loans go.
Haron echoes comments made by CBA that, if a best interest duty was warranted, it should apply across the board. And as NAB pointed out, he says the challenge will be defining what ‘best interest’ means.
“I think the focus should be on putting the customer’s interests ahead of the broker’s, and I think the majority of the brokers today pass that test with flying colours,” he says.
As for whether trail discourages brokers from assisting their clients in refinancing to a better rate – an issue the commission has raised – Haron says this is unlikely because there is a benefit for the broker in doing the right thing by their customer, while also earning another upfront commission. He and other industry figures have said the reason it’s so important to have a healthy upfront and a healthy trail structure is to prevent churn.
“Churn is when a broker refinances a client when there’s been no obvious benefit to the client … and that’s an important part of making sure that we don’t have an upfront and trail out of whack,” Haron says.
At MPA’s Major Bank Roundtable in February, some of the broker chiefs spoke about aggregators needing to be better at meeting their responsibilities around accreditation.
When asked if aggregators are doing enough, Haron says that while some are, improvements should be made to training and mentoring newcomers so that banks can be confident in their abilities and longevity in the industry. Broker businesses are also part of this equation, he says, and aggregators need to work with the bigger groups to make sure their training and hiring standards are sufficient.
“The banks should have complete confidence in the aggregator’s ability to accredit a broker and ensure that a broker’s performance on an ongoing basis is at a reasonable standard. I think that’s really important. We need to do more, and we’re letting the industry down. We’ve got to have a higher standard of requirements of brokers and their training, without a doubt.”
It’s incumbent on aggregators to set these standards, Haron says.
“We have to be the change of the industry, otherwise we will be changed.”