But will the reforms adopted be enough to satisfy the royal commission?
The major banks have made their thoughts known to the royal commission on how broker remuneration should be adjusted, expressing support for the Combined Industry Forum’s ‘funds utilised, net of offset’ reform and an increased obligation on brokers to serve their customers’ best interests.
While all of the banks agreed that that tweak to commissions was necessary, their thoughts varied on whether brokers’ legal duty should be augmented and how.
CBA, for instance, said it supported the extension of “elements” of the Future of Financial Advice reforms (FOFA) being extended to brokers, including a best interests obligation that goes beyond the current “unsuitability” test. However, the bank also noted the differences between brokers’ and financial planners’ jobs and said “caution should be exercised” if the same obligations were to be proposed.
On the contrary, Westpac argued that this cross-over of obligations wouldn’t work.
“Given the nature of the broker’s role in dealing with customers, the introduction of a ‘best interests’ obligation for brokers of the kind which currently applies to financial advisers is unnecessary and likely to be problematic in practice,” Westpac said.
Westpac said it supported an improved framework and clarification of obligations for brokers, as well as sufficient disclosures to customers.
ANZ and NAB both said they were onboard with the CIF’s customer-first duty proposal, with NAB saying that it “is preferable to any general ‘best interest’ test that does not clearly set out the requirements to satisfy the duty”.
The CIF’s ‘customer-first duty’ proposal would require brokers to put customers’ interests first and match their needs with the right home loan product to promote “good customer outcomes”.
While the banks’ recognised ASIC’s finding that commissions linked to loan size may potentially lead to poor customer outcomes, they said that by adopting the CIF proposal, the risks of this would be mitigated.
All the majors have committed to implementing the reforms proposed by the CIF to base upfront on the funds drawn down and utlised by the customer (net of offset account balances).
Bankwest made those changes in July; NAB’s changes will come into effect today (12 November) and CBA and ANZ said the changes will be implemented by the end of December. Westpac did not clearly state in its submission when it planned to achieve this outcome, although the CIF has set the deadline for the end of this year.
“NAB recognises that the current changes being implemented do not entirely remove the potential conflict of a commission-based model. NAB also accepts that if there is a policy-based reason to move away from value based commissions entirely, the industry should reconsider a commission based model – for example, if it were determined (on evidence) that customer outcomes are jeopardized by value based commissions.”
CBA said that if commission structures needed to be changed beyond the reforms recommended by the CIF, industry consultation and legislation would be required. “This would ensure that any outcome achieves the proper balance of eliminating conflicts of interest that lead to potentially poor client outcomes and ensuring that existing and future participants can still be financially viable,” CBA said.
Westpac noted that commissions determined on the basis of the value of the loan have an important purpose: they are intended to ensure that brokers are properly remunerated for the size and complexity of the loan they write and are not disincentivised from facilitating more time-consuming loans.
Westpac said other forms of remuneration, such as an upfront flat fee, may affect access to finance and raise other conflicts.
ANZ was on the same page, saying that “remuneration should continue to be paid by upfront and trail commissions rather than by other remuneration models”. The bank also said it supported the continued use of trail. “Trail commissions promote better customer outcomes by giving brokers an incentive to recommend loans that will be suitable to the customer for the life of the loan, and assist the industry to attract and retain quality brokers.”
But will these changes satisfy the royal commission?
With lenders and aggregators having already adopted some of the Combined Industry Forum’s key reforms, such as removing soft dollar payments and volume-based incentives, they have shown that they are collaboratively moving forward to improve the system, said Deloitte financial services partner James Hickey.
Now the banks are starting to make headway on broker remuneration reforms. These changes, and any further recommendations, need to “carefully consider the impact of any greater structural change on competition and customers. The viability of the broker channel and possibly removing choice and support from customers would be at risk,” Hickey said.
While the current commission structure is not perfect, neither is the flat fee model, which Treasury highlighted in its initial submission to the royal commission.
“It is difficult to find a perfect model that completely removes risk and yet continues to provide customers with the service they value and at a price point they can reasonably afford.
“What is important is to become more aware of what and when certain structures risk poorer outcomes. Mitigants to safeguard against such outcomes will be essential. It will also be necessary to regularly monitor them.”