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The mortgage broking industry is questioning a key recommendation of the Hayne royal commission, saying it was based on incomplete evidence submitted by Commonwealth Bank. By Paddy Manning.

Mortgage brokers oppose changes to trail commissions

Broking industry experts claim that key data relied upon by the Hayne royal commission to frame its recommendation that mortgage broker trail commissions be banned was “highly selective” and “misleading”.

The data was contained in slides provided to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by Commonwealth Bank of Australia, which appeared to indicate mortgage brokers were shopping around for the highest commission rather than the best rate for borrowers.

A broking industry source, who has analysed historical data to identify the discrepancy within CBA’s data but does not wish to be identified for fear of retribution by the bank, tells The Saturday Paper: “When you factor in the data the CBA left out, including an undisclosed CBA bonus and the missing dates with the corresponding market share figures, it showed a completely different picture. Brokers were actually chasing rate, not commission.”

The bank has conceded that relevant data was not contained in the key slide in question but rejects any suggestion it was deliberately attempting to mislead the commission. “We completely refute the suggestion that our internal document was in any way misleading to the royal commission or any other parties,” a spokesperson said. “The document in question was created years prior to the royal commission and was one of thousands of documents that were subpoenaed by the commission.”

However, the mortgage broking industry is up in arms over CBA’s evidence, and some are convinced there was a deliberate attempt to influence the commission’s recommendations.

Peter White, managing director of the Finance Brokers Association of Australia, said there was no doubt the royal commission was highly influenced by CBA, which “stood alone” among the banks in its evidence against mortgage brokers. The key slide in question was cited by the commission in its final report.

“The measures that came out from the royal commission were principally based on CBA,” says White, of the trail commission ban. “I think CBA has deliberately pushed forward commentary that they would like to see play out … It has not given the full picture. A crock of shit, as far as I’m concerned. Absolute crap.”

The key omission was from a graphic in a CBA slide pack that compared the commissions and interest rates on offer from two lenders – CBA and Suncorp – in the final quarter of 2014 and the first half of 2015.

The slide tracked the flow of mortgages into each and showed Suncorp’s loan product offered much higher commissions for brokers – 0.15 per cent higher than CBA – and interest rates that were 0.51 per cent lower.

It was a sensational offer, and Suncorp’s market share almost tripled.

Crucially though, CBA did not disclose that, in the relevant quarter, it had launched a short-term campaign offering a 0.1 per cent bonus commission for brokers. Its market share still fell despite the commission increase, which would have distorted the picture that mortgage brokers were chasing commission.

Suncorp made three more moves in the market, but CBA left two out of its slide. When Suncorp raised its rate and lowered its commission offer, its market share fell again, as might be expected. Subsequently Suncorp raised its commission again – which CBA did not disclose in the slides – but its share continued to fall. Finally, in June 2015, when Suncorp lowered its rates, the market share jumped back up again, suggesting brokers were watching interest rates keenly.

“What was not disclosed was a second offer of higher commission by Suncorp, which resulted in a market share decline [for Suncorp],” says the broking source. “It was only when Suncorp offered a cracking hot rate, the market share jumped back up as before. Meaning you’d have to conclude the flow was rate-driven, not commission-driven as implied by CBA.”

Tim Brown, a former Macquarie Bank mortgage broking executive who is now chief executive of financial services group Ezifin, agrees. “The data clearly shows broker performance was not driven by commission – in fact the data shows the reverse is true,” he says.

“How does one of the largest banks in the country assume they can present the data in such a way that subsequently led to misinformed recommendations in the final report by the royal commission?”

The CBA slides were produced ahead of two independent reviews of mortgage broker remuneration in 2017 – one by former top public servant Stephen Sedgwick, and the other by the Australian Securities and Investments Commission (ASIC). Neither review recommended the abolition of trail commissions.

CBA argues it is not contentious that offers of higher commissions could lead to increased flows for lenders – a position accepted by the Combined Industry Forum, made up of mortgage aggregators and lenders, which met before the royal commission. In its submission to ASIC’s remuneration review, the forum stated all lenders would move away from volume bonuses by the end of 2017.

The dispute is significant in the lead-up to next weekend’s election, with the Coalition and Labor at odds over Hayne’s recommendation that broker commissions were conflicted remuneration and should be replaced by a fee-for-service model. Some within the broking industry believe this is CBA’s ultimate aim – for Australia to adopt the so-called Netherlands model – driven by the prospect of additional customer loan fees, savings on broker commissions and more profitable home loans. Brokers estimate this windfall could be worth hundreds of millions of dollars yearly.

The government rejected this recommendation of the Hayne inquiry, but the Labor Party has adopted it, proposing to ban trail commissions from July 1, 2020. It would replace them with a higher flat-rate upfront commission of 1.1 per cent – effectively, enough to cover existing upfront and trail commissions for the first four years, which is the average life of an Australian home loan before refinancing.

Shadow treasurer Chris Bowen declined to comment for this story. However, at a superannuation industry conference in Melbourne this week, opposition assistant treasurer Andrew Leigh cited Commissioner Hayne’s observation that “the broker’s work is complete when the loan is arranged, and brokers have no obligation to provide continuing services in return for their trail commissions”. Leigh also pointed to the royal commission’s highlighted examples, in which mortgage brokers weren’t acting in the best interest of their clients.

The mortgage broking industry is clearly bracing itself for the disruption Labor’s plans may bring. Brokers would have to shift from valuing their businesses on earnings, rather than on a multiple of the recurring trail income. There are almost 20,000 brokers nationally, which account for nearly 60 per cent of new home loans, worth about $200 billion a year.

Peter White acknowledges the industry was beset by poor practices in the 2000s but says it has lifted its game since the introduction of the National Consumer Credit Protection Act in 2009. He predicted the reforms may not clear the senate, depending on the make-up of the crossbench.

White adds that the Coalition’s policy – to review mortgage broker remuneration after three years – “has to go, too”. The industry has been subjected to a string of reviews over the years, but only the royal commission has favoured a recommendation to abolish trail commissions. “We started in 2014 with a question mark over brokers’ remuneration,” says White. “That would mean it will be between eight to 8.5 years that brokers will have to live with a question mark over whether they’ve got revenue coming in.”

Tim Brown also calls on Labor to reconsider. “Given the pending election,” he says, “and Labor’s indication that it will remove trailing commissions sooner and ahead of the Liberals’ promise of three years, the impact of the selective CBA data needs to be addressed.”

This article was first published in the print edition of The Saturday Paper on May 11, 2019 as "Trails and tribulations". Subscribe here.

Paddy Manning
is contributing editor (politics) at The Monthly.