LAZY ASIC has refused for two decades to use existing powers to protect "millions of

consumers from predatory mortgage lending."

ASIC tells big four banks to open their property deal books

Australian Financial Review Jun 3 2016 2:25 PM

Duncan Hughes

ASIC will require mortgage lenders to trawl through thousands of deals worth billions of dollars to trace commission payments, bonuses and incentives made to brokers as part of its sweeping review of remuneration structures.

The regulator, which was requested by the federal government to probe the mortgage broking market following the financial system inquiry, is seeking lenders to provide detailed breakdown of deals going back to 2012.

Twelve lenders, including the big four banks, mid-tier and smaller providers will be sent notices over coming days compelling them to provide what will often be commercially confidential information.

"We want this review to be comprehensive," said Michael Saadat, senior executive leader with responsibility for deposit takers, credit and insurers  for the Australian Securities and Investments Commission.

"We want to understand the importance of remuneration for consumer outcomes," he said.

Administrative costs of locating, reviewing, collating and presenting the data to the review will be paid from existing resources with additional work expected to result from the conclusions funded by the extra $127 million that large companies were recently asked to stump-up to fund the regulator.

ASIC has completed a review of submissions that it requested five months ago into how to go about analysing an industry that directly engages more than 500 broker businesses, 5000 licensees, more than 20,000 representatives, about 100 lenders, including the nation's big four banks, and millions of consumers.

A copy of confidential recommendations setting out the scope of the review – which has been obtained by The Australian Financial Review – has identified key issues for review, set two months for analysing data and three months for preparing a report to be delivered to the government by year's end.

Property markets and its participants are regulated by a mish-mash of state and federal consumer laws, self regulatory bodies, common law, industry codes, investment laws and widely varying barriers of entry.

The core issue for the review that the government wants an answer on will be whether current broker payment for recommending mortgages are fair, transparent and good deal for consumers.

For example, it is expected to compare the outcome for a consumer of a loan recommended by a bank employee compared to a broker. It is also likely to test the claim that a broker employed by a bank is more likely to recommend its products rather than a competitors.

It will also look for evidence that brokers recommend bigger loans to maximise commission payments.

At the heart of the review is whether brokers receiving commission from a lender is acting in the best interests of the consumer, lender, or their own motive to maximise returns.

For example, a house buyer taking out a $1 million mortgage over 25 years through a broker will be paid an upfront commission of 0.66 per cent, 0.15 per cent for the next three years and 0.25 per cent a year for the remainder of the term.

The estimated present value of the broker commission is $28,800, assuming no additional repayments, according to calculations by actuary Rice Warner.

The review will not consider the role of property developers that routinely offer brokers and financial advisers bigger commissions, volume-linked bonuses for delivering multiple buyers for dwellings in a complex, cash incentives and other lucrative perks.

They include additional commissions of between 5 and 10 per cent of the sale price, often worth more than $50,000, bonuses for three or more sales, $10,000 rebates on listed properties, 10-year rental guarantees.

Industry participants have publicly welcomed the review but behind the scenes there is a lot of suspicion that powerful interests will attempt to manipulate the agenda for their own purposes.

Many brokers, which account for more than half of mortgage recommendations, fear banks will also attempt to use mortgage brokers as a scapegoat for consumer anger about banking practices and use the review as a way to avoid scrutinising commissions paid to their own staff.

With bank profit margins falling and political pressure likely to make it difficult for the banks to raise interest rates, the commission review could also allow the bank to reduce commission payments.

The review will involve lenders, aggregators, such as AFG, which represent brokers, comparison websites, and referral and introducer businesses.

But it will be restricted to remuneration arrangements associated with sale of residential mortgage products and not other products, such as reverse mortgages or construction loans.

It will also review rapidly evolving ownership structures, such as financial advisors taking over mortgage brokerages, involving companies that integrate designers, builders, mortgage brokers and financial advisers.

Alternatively, there are growing commercial alignments, such as equity stakes and licensing arrangements.

For example, Yellow Brick Road acquired mortgage originator's Resi for $36 million and Vow Financial, a mortgage aggregator, for $17.6 million, to create a network of 700 brokers and a $18 billion mortgage book, according to analysis by Forte Asset, a company that brokers deals between financial service companies.

ASIC will use the data from loan performance over five years to review incentives and non-cash bonuses involving lenders, aggregators, brokers, companies that provide referrals or introductions, such as financial advisers.

Consumer groups claim commission payments are not in the consumers best interests and contribute to the high turnover in mortgages, with the average mortgage lasting about six years, or less than one-quarter of a typical loan.

Peter White, an industry veteran and consultant to the Finance Brokers' Association, which represents about 600 mortgage brokers, believes commissions are justified because brokers negotiate, administer and liaise between the lender and consumer.

But he backs any moves to ban bonuses that encourage volume sales.