Mortgage brokers settled around 51.5 percent of all new residential home loans in Australia according to the Mortgage & Finance Association of Australia (MFAA)’s recent report. However, is a mortgage broker working for you or the bank?
Commission Payments Create Conflict of Interest
Sales incentives provided by banks to brokers, such as upfront or trail commissions, has led the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry into questioning the misalignment of a consumer’s understanding of the role of brokers and actuality.
The Australian Securities and Investments Commission (ASIC) argues that rather than working for the consumer’s best interest, these bonus payments incentivise brokers into convincing the customer into taking larger and riskier loans. The banking Royal Commission’s senior counsel, Rowena Orr QC states that “the larger the loan, the larger the upfront payment” and “the longer the loan takes… the larger the trailing commission”.
Consumers’ lack of expertise in the field have limited their ability to choose the product that best aligns with their interests. Instead, a majority of Australians rely on mortgage brokers to assist in this decision process.
In fact, MFAA’s report outlines that around 18 percent of consumers use brokers to get a better deal, and that 82 percent assess brokers as being in their interests ‘all’ or ‘some’ of the time. This shows that consumers have developed an implicit understanding that the brokers are acting as their agents, rather than for banks.
However, ABC News reported that the Commonwealth Bank of Australia has admitted that customers who use mortgage brokers tend to pay more on their loans – not less.
Australian banks have been looking into restructuring commissions to reduce conflicts of interest. For mortgage brokers, the newly introduced term, “good customer outcomes” will set a more stringent standard, requiring brokers to consider whether a loan is appropriate and if it meets individual consumer needs. It is likely that banks will wait for legislation or regulations to uniformly change commissions policy to ensure that no organisation will be disadvantaged.
The Royal Commission interim report is due in June or July, in which their findings regarding brokers’ conflicts of interest will be detailed in greater depth. In the meantime, the Commission has criticised not only mortgage brokers setups, but also the mortgage industry as a whole for its “smoke and shadow”.
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