As part of the federal government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the government asked the Australian Securities and Investments Commission (ASIC) to undertake an industry-wide review of mortgage broker remuneration.

“The Review found that the current mortgage broker remuneration and ownership structures create conflicts of interest that may contribute to poor consumer outcomes,” said an official release on the website of The Treasury.

ASIC also asserts that the standard model of upfront and trail commissions often leads to conflicts of interest.

There are two primary ways in which these conflicts of interest emerge. First, a broker could recommend a loan that is larger than the consumer needs or can afford because the broker wants to maximise the commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (such as choosing an interest-only loan). ASIC calls this a “product strategy conflict”.  

Second, a broker could be incentivised to recommend a loan from a particular lender because he knows he will receive a higher commission from that lender, even though that loan may not be the most suitable for the consumer. ASIC refers to this as the “lender choice conflict”.  

In response, ASIC has put forward six proposals to improve consumer outcomes and competition in the Australian home loan market. These include:

  • changing the standard commission model to reduce the risk of poor consumer outcomes
  • discouraging bonus commissions and bonus payments, as these increase the risk of poor consumer outcomes
  • improving the oversight of brokers by lenders and aggregators  

Following a 10-month review of the mortgage broking industry’s complex remuneration structures, ASIC has acknowledged that mortgage brokers perform a useful service for consumers by allowing smaller lenders to compete with the major banks at a national level. This also ensures that consumers have access to a wider variety of home loan options.  

It is also apparent that ASIC isn’t in favour of upsetting the industry’s competitive dynamic, which has become critical to the survival of mutual and smaller banks.