Move to upfront based on drawdown, without top-ups, goes against recommendations of broker associations and aggregators
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Move to upfront based on drawdown, without top-ups, goes against recommendations of broker associations and aggregators
Brokers will be paid commission based on drawdown, net of offset, by the end of 2018, under principles drawn up by the Combined Industry Forum.
The CIF, which includes broker associations, lenders, aggregators and consumer advocates noted that the new structure will “avoid financial incentives that encourage consumers to borrow more than they need or will use.”
Concerningly for brokers, the move goes against recommendations made by the MFAA, the FBAA and aggregators earlier this year.
Writing to the Treasury in June, the MFAA dubbed the drawdown net of offset arrangement “unlikely to be suitable” noting that “unintended consequence could be to not pay commission on funds placed in offset for a renovation or deposit on investment property or any other legitimate imminent use.”
The MFAA said a system with later top-ups could be suitable, however, top-ups were not included in the CIF’s proposed changes.
Yesterday, MFAA CEO Mike Felton told MPA that the commission model debate “was without doubt the most difficult [issue] to solve” but that offset had been called out as a “non-negotiable” by both the ASIC and Sedgwick Reports and thus “had to be addressed”.
The FBAA’s earlier submission had warned that “any change to remuneration models which adversely impact brokers provide no gain to consumers,” whilst conceding commission based on draw-down “may be possible”. Speaking to MPA yesterday, executive director Peter White said the new arrangements were “commercially fair” to lenders and were in response to ASIC’s concerns.
A win for brokers?
Brokers may not be as welcoming to the new commission model as industry associations, early indicators suggest.
A poll by MPA of brokers found that as of 5pm yesterday the majority, 61%, were against commissions based on facility drawdown net of offset, with 25% in favour.
Some brokers were concerned about the impact on construction lending, which the Combined Industry Forum had anticipated, noting changes “may require further consideration in certain limited circumstances, such as residential construction lending.”
MFAA CEO Felton explained to MFAA that “if you change behaviour and use a facility limit rather than an offset account you can be remunerated at the time of your initial drawdown and for subsequent draw downs.”
Positively for brokers, other approaches to commissions were rejected by the CIF, such as LVR-based commission. Despite complaints by consumer advocates, trail commission remains essentially unchanged, albeit based on the drawdown amount.
Impact on offset accounts
Given the popularity of offset accounts in Australia and so the impact of commission changes could be widespread.
In August the RBA noted that offset balances are growing at around 14% per annum. Given they were worth around $90bn in 2015, the amount now is likely to be far bigger. Overall offset accounts represent 16% of outstanding loan balances.
Looking at a loan amount of $370,000 at 80% LVR, comparison site CANSTAR found that around two-thirds of owner-occupier and investor variable rate loans offer offset accounts. Fixed rate loans are significantly less likely to offer offset accounts, however.
This article is part of a series on the future of broker remuneration and governance. To read more click here.
Brokers will be paid commission based on drawdown, net of offset, by the end of 2018, under principles drawn up by the Combined Industry Forum.
The CIF, which includes broker associations, lenders, aggregators and consumer advocates noted that the new structure will “avoid financial incentives that encourage consumers to borrow more than they need or will use.”
Concerningly for brokers, the move goes against recommendations made by the MFAA, the FBAA and aggregators earlier this year.
Writing to the Treasury in June, the MFAA dubbed the drawdown net of offset arrangement “unlikely to be suitable” noting that “unintended consequence could be to not pay commission on funds placed in offset for a renovation or deposit on investment property or any other legitimate imminent use.”
The MFAA said a system with later top-ups could be suitable, however, top-ups were not included in the CIF’s proposed changes.
Yesterday, MFAA CEO Mike Felton told MPA that the commission model debate “was without doubt the most difficult [issue] to solve” but that offset had been called out as a “non-negotiable” by both the ASIC and Sedgwick Reports and thus “had to be addressed”.
The FBAA’s earlier submission had warned that “any change to remuneration models which adversely impact brokers provide no gain to consumers,” whilst conceding commission based on draw-down “may be possible”. Speaking to MPA yesterday, executive director Peter White said the new arrangements were “commercially fair” to lenders and were in response to ASIC’s concerns.
A win for brokers?
Brokers may not be as welcoming to the new commission model as industry associations, early indicators suggest.
A poll by MPA of brokers found that as of 5pm yesterday the majority, 61%, were against commissions based on facility drawdown net of offset, with 25% in favour.
Some brokers were concerned about the impact on construction lending, which the Combined Industry Forum had anticipated, noting changes “may require further consideration in certain limited circumstances, such as residential construction lending.”
MFAA CEO Felton explained to MFAA that “if you change behaviour and use a facility limit rather than an offset account you can be remunerated at the time of your initial drawdown and for subsequent draw downs.”
Positively for brokers, other approaches to commissions were rejected by the CIF, such as LVR-based commission. Despite complaints by consumer advocates, trail commission remains essentially unchanged, albeit based on the drawdown amount.
Impact on offset accounts
Given the popularity of offset accounts in Australia and so the impact of commission changes could be widespread.
In August the RBA noted that offset balances are growing at around 14% per annum. Given they were worth around $90bn in 2015, the amount now is likely to be far bigger. Overall offset accounts represent 16% of outstanding loan balances.
Looking at a loan amount of $370,000 at 80% LVR, comparison site CANSTAR found that around two-thirds of owner-occupier and investor variable rate loans offer offset accounts. Fixed rate loans are significantly less likely to offer offset accounts, however.
This article is part of a series on the future of broker remuneration and governance. To read more click here.
