ASIC remains neutral on fee-for-service, but flags remuneration conflicts

ASIC has reiterated its concerns around bonus-based incentives, but says much needs to be taken into account before flat fee could be adopted

ASIC remains neutral on fee-for-service, but flags remuneration conflicts

by Otiena Ellwand and Abel Riototar 

In a submission to the royal commission, ASIC noted that while it does believe brokers play an important role in the home loan market, it has also long recognised that “conflicted remuneration is a misaligned incentive that can and does create a supply-side driver of poor conduct”. But it did not go so far as to suggest that fee-for-service should be adopted.

ASIC reiterated its concerns around volume and bonus-based incentives, saying these conflicts can and do result in misconduct and poor consumer outcomes. It also said that disclosure alone is not an effective means of dealing with the risks created by conflicts of interest in remuneration structures.

As part of the Combined Industry Forum’s platform to reform the industry, it recommended lenders address and move away from bonus commissions and volume based payments. ASIC said it considers the CIF as a “positive step by the industry towards addressing the concerns raised in ASIC’s Report 516 [broker remuneration report]”.

“Whether or not these industry-led changes will be sufficient remains to be seen,” ASIC wrote. 

Where does ASIC stand on flat fees?
One suggestion is the lender pay the broker a flat fee, removing the product-strategy conflict. By decoupling the size of the commission from the size of the loan, this removes the incentive to recommend larger loans, ASIC said. But lender-choice conflict remains because one lender may be able to offer a larger flat fee than another.

ASIC warned that any shift to a fee-for-service model should take into account how it might affect the following:

  1. The mortgage broker market – such as market consolidation
  2. The broader mortgage loan industry – such as change in dynamics between smaller and larger lenders, market concentration, and contestability
  3. Consumers – including consumer access, choice of products and services, and consumer decision making
New powers for ASIC
CBA said during its evidence to the royal commission that any bank that makes the first move on reforming broker remuneration will face a commercial impediment. ASIC acknowledged that collective action problems can make industry-wide reform difficult and may require regulatory action.

The government is currently considering whether an added regulatory tool might help ASIC deal with such ‘first mover’ problems.

This ‘product intervention power’ would give ASIC the ability to prohibit remuneration structures that create unacceptable risks to consumers. If enacted, it would empower ASIC to regulate, or if necessary, ban potentially harmful financial and credit products where ASIC believes there is a risk of significant consumer detriment.

It would also allow ASIC to “break first mover deadlocks that emerge in the future”.

Brokers weigh in on fee-for-service
Not everyone is enthusiastic about the fee-for-service model, though. Just ask a broker.

Finweb director James Angus said he considers ASIC's recommendations more highly because the regulator to date is the only agency that conducted a thorough analysis and investigation of the mortgage industry.

One serious consequence he sees from the fee-for-service model is that it would diminish competition in the home loan market, especially between major banks, smaller banks and non-bank lenders.

Lighthouse Financial Services director Paul Lewis sees it as unworkable. "The bank pays commission as a ‘cost of acquisition’ for the business," Lewis told MPA. "It does not impact the cost of the loan in any way, shape or form, and it does not pose a threat to good consumer outcomes."

He added that brokers provide good customer outcomes by way of client education and a broad panel of lenders that help clients make informed decisions. For him, those are unavailable via direct channels.

"The reality, however, is that very few clients would be willing to pay the required fee for this benefit," Lewis said.

 

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