Mortgage brokers face best interests duty

8 February 2018
| By Mike |
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A consumer best interests duty should be imposed on the mortgage broking industry, according to the Productivity Commission (PC).

The PC has found that the payment of trail commissions creates perverse incentives for mortgage brokers by rewarding them for keeping customers in their existing loan.

It said “broker loyalty appears skewed towards the institution, not the customer, and thus likely discourages refinancing” while “the inclusion of commission clawbacks in the remuneration structure for mortgage brokers acts as a direct disincentive to consumer switching of home loans”.

In a draft report referencing the benefits of many of the regulatory changes imposed on the financial planning industry, the PC said the Australian Securities and Investments Commission (ASIC) should impose a clear legal duty on mortgage aggregators owned by lenders to act in the consumer’s best interests.

“Such a duty should be imposed even if these aggregators operate as independent subsidiaries of their parent lender institution, and should also apply to the mortgage brokers operating under them,” the PC’s draft report on Competition in the Australian Financial System said.

Discussing the issue, the draft report pointed to the issue of contractual arrangements between providers and intermediaries and said that for some products, the payment of commissions by financial service providers could undermine the ability of intermediaries to give impartial advice or recommendations in the interest of consumers.

“For example, in the home loan market, mortgage brokers are remunerated via commissions paid by lenders, which could create disincentives for brokers to act in the interests of consumers,” it said.

 

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