Royal Commissioner Kenneth Hayne’s simple question has banks and brokers stumbling for anwers. (AAP: Edie Jim)
Bribes, conflicts of interest and hidden fees: Banking royal commission off to incredible start
More than half of Australia’s home loans are organised by mortgage brokers.
But are they working for you, the bank, or themselves?
Commissioner Kenneth Hayne, presiding over his Royal Commission into misconduct in banking, was both clear and relentless in his pursuit of an answer to this question.
He repeated it on the final day of the first public hearings:
So who does a broker act for, who does the customer think the broker acts for, who does the lender think the broker acts for, are there varying or varied answers at various steps? If there are, what are they?
The Commissioner asked the lenders and brokers to think about it, and respond. They have.
Let’s break down the responses.
Who does a broker act for?
In the hearings, NAB got a kicking over a “finders fee” program for mortgages called Introducers.
The Introducers were meant to professionals like solicitors and accountants. Instead one of their Introducers, potentially a tailor, helped write $122-million in loans and reaped $488,000 in fees.
NAB clearly didn’t like the query given the curt nature of its response: “This is both a legal and a factual question, which — as posed at the current level of generality — is not capable of a simple answer.”
So the bank didn’t give one.
But the Finance Sector Union didn’t stuff around: “There is no clear answer to the question posed by the Commission.. [so] the truism that ‘if you are not paying for it, you’re not the customer, you are the product being sold,’ applies”.
NSW Legal Aid backed them up: “There is a misalignment between the consumers’ understanding of a broker’s role, the broker’s role in practice and the position at law.”
The Commonwealth Bank got straight to it: “customers believe that brokers are their agents”.
The CBA supported its view with research commissioned by the brokers’ lobby group, suggesting, “customers choose to use a broker to help provide advice and guidance, as well as price negotiation.”
This is a touch different to what their CEO Ian Narev — in a previously secret document tendered to the Royal Commission — had revealed in the hearings.
“The use of loan size linked with upfront and trailing commissions for third parties can potentially lead to poor customer outcomes” he wrote then.
Before the royal commission started, all the institutions were given 50 pages to detail misconduct or behaviour falling below community standards in the previous decade.
Aussie Home Loans cleared themselves in eight short paragraphs — but didn’t make that mistake twice.
In 29-pages of dense responses, Aussie said “mortgage brokers have a direct incentive to act in the best interests of customers such that there is a coincidence of interests in a well performing market”.
But regulator the Australian Securities and Investments Commission (ASIC) gets the last word.
Their submission sounded a bit world weary, constantly referring to their previous explorations of the field.
It rarely gets spelt out more clearly than this: “For mortgage brokers, ASIC found that some types of misaligned incentives created an unacceptable risk of poor consumer outcomes such as bonus commissions (including volume-based commissions) and bonus payments”.
Who does the customer think the broker acts for?
This is likely the kicker that Commissioner Hayne will get stuck in to, because everyone has a different answer.
NSW Legal Aid is out in the community, talking to people.
“In our casework experience consumers largely perceive the broker to be a genuine intermediary,” they found.
ASIC expanded on the theme: “Consumers’ biases or lack of understanding about financial products reduce their ability to (choose) financial products that are better aligned with their own interests or by switching” products or institutions.
NAB wanted more detail, including this sentence which reveals more about the multiple potential conflicts than it probably ever intended to: “The answer to this question will depend (on) the terms of the relevant contract between the broker and the lender, the broker and the customer, the customer and the lender, the aggregator and the broker, and the aggregator and the lender”
The Financial Sector Union was, again, blunt. No play, no pay.
“The broker is only paid if a customer obtains a loan. Such payments can be significant — typically on a $500,000 loan the broker would receive a flat fee of $2,700 plus an annual trailing commission of up to a further $700. Absent a loan, the broker will receive nothing”.
What about the services before and after a loan? That’s what Aussie focussed on, detailing the services done for no payment whatsoever, except for the “upfront and trail commissions received on settled loans.”
CommBank went to the research, saying customers “assess satisfaction with their brokers as if they are their agents. This is supported by the MFAA research which suggests that 82 per cent of customers evaluate broker actions as being in their interests all or some of the time”.
Who does the lender think the broker acts for?
The Finance Brokers Association of Australia (who were not asked to make a response to the initial hearings) suggest a broker is something like a chef: they work for the customer, but sticking to the rules laid out by their kitchen manager.
Commonwealth Bank continues the theme, that a broker is acting “as an agent for the customer” except when they work for the bank on things like “customer identification, tax file number disclosure, privacy protection of information forms and any bank account opening application”.
The Consumer Action Law Centre wasn’t buying it: “The overwhelming evidence before the Commission is that brokers do not act in the best interests of the consumers, but are instead driven by sales incentives such as upfront or trail commissions”
The Finance Sector Union chimed in on the same tune: “having met minimum legal obligations, brokers act on the basis of a series of drivers and incentives”
As did the regulator, ASIC, who found incentives from lenders “played a significant role in driving conduct by affecting the priorities of lenders’ staff, which in turn affects an entity’s culture, encouraging and reinforcing particular conduct”.