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Broker standards must be lifted

CHOICE calls for an end to commissions and conflicts in the mortgage broker sector

10 July 2017

Consumer group CHOICE is calling for action to cut the conflicts in home loan sales to protect consumers in a joint consumer submission to Treasury as the Federal Government examines the mortgage broking sector.

"Consumers deserve better than what they're getting from most mortgage brokers. They're using brokers as guides for what is life's most significant financial decision - buying a home. Getting a poor loan can mean tens of thousands or even hundreds of thousands of dollars more over the life of a mortgage," says CHOICE Head of Campaigns & Policy Erin Turner.

"Right now, there is no requirement that a mortgage broker has to act in the interests of the customer by recommending the best or even a good loan."

"Mortgage brokers should be driving competition in the banking sector but the way mortgage brokers are currently paid means it's very unlikely that a customer is going to get a loan that's best for them."

"This industry needs a major change. It's time to cut out the dodgy practices – from bonuses or trips to the Caribbean for flogging loans to commission arrangements that mean that lenders interests get put ahead of customers."

"We've called for urgent action on trail commissions, monthly payments from a lender to an aggregator which is passed onto a broker over the life of a loan.  A lender pays out an average of $750 per year for the life of a home loan through trail commissions. [1] Trail payments are money for jam. The broker makes money for doing nothing, discouraging them from reviewing the quality of a loan long-term."

CHOICE has worked with financial counsellors and community legal centres to outline reforms needed in a joint consumer submission to Treasury.

"ASIC has set out a series of problems with mortgage broker pay and behaviour but has left it up to the industry to find a solution. This is simply not good enough," says Ms Turner.

"There have already been meetings between brokers, behind-the-scenes aggregators and the big banks to work on solutions. This arrangement almost guarantees that solutions will work extremely well for every party but consumers."

The joint consumer submission on mortgage broker remuneration makes 16 recommendations, including that:

  • Upfront commissions are removed and replaced with fixed fees for advice, either lump sum payments or rates based on hours of work required to arrange a loan.
  • Trail commissions are removed.
  • Bonus commissions, bonus payments and soft dollar payments are removed within the year.
  • Brokers are required to disclose ownership relationships and the lender behind any white-label loan recommended to a consumer.
  • The law is amended so that brokers have to act in the best interests of their clients.

Mortgage broker myth busting

Consumer perception


Brokers will arrange a better deal than if a consumer approaches a lender directly: 25% of all consumers and 58% of consumers with experience of or plans to use a broker thought that brokers would offer a better deal than a bank.[2]

Brokers do not get their clients better priced loans.[3]

Brokers look at a wide range of loans to get consumers a better deal The main reasons people said they would use a broker is to access a wider range of home loans (32% overall and 40% with experience or intention to use a broker) and to get a better interest rate or deal (27 overall, 35% with experience or intention to use a broker).

Brokers send 80% of borrowers to four preferred lenders.[4]

A broker puts the customers' needs first 86% of people with experience or intention to use a broker thought that brokers would put customer needs first all (27%) or some of the time (59%).[5]

Legally, a broker is only obliged to arrange a 'not unsuitable' loan. Commissions and other payments means it's highly likely a broker will recommend a loan or investment strategy that does not put customer needs first. Brokers don't have to act in the best interests of the client.

Brokers get paid the same amount regardless of the loan arranged 36% of people with experience or intention to use a broker mistakenly believe that brokers get paid the same regardless of the loan[6]

Most brokers are paid varying commissions for loans arranged in addition to volume-based payments, campaign commissions and soft dollar benefits.

[1] ASIC (2017), Report 516: Review of mortgage broker remuneration, paras 465-466.

[2] ASIC (2017), Report 516: Review of mortgage broker remuneration, para 906.

[3] Finding six: interest rates are not different between distribution channels, Ibid, p. 15.

[4] Ibid, para 86.

[5] Ibid, para 913.

[6] Ibid, para 916