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Will the royal commission be satisfied by the CIF's commission tweaks?
All of the major banks have now made their move on commission changes, bringing brokers’ remuneration in line with the Combined Industry Forum’s proposal to base upfront on the funds drawn down and utilised by the customer, net of offset account balances and redraw facilities.
While each bank has implemented the changes slightly differently, the overarching message to the market is that this adjustment was needed to mitigate the risks of value-based commissions leading to poor customer outcomes. But it’s yet to be seen if this tweak will be enough to satisfy the royal commission, whose final report comes out in February.
In a research paper on conflicts of interest and disclosure commissioned by the royal commission, Cornell University professor Sunita Sah wrote that while many advisers denied being influenced by financial inducements, the data showed the opposite and conflicts of interest did play a “substantial role in influencing advisers’ attitudes and decision-making”. That issue remains at the heart of what the royal commission is trying to figure out. The problem is – the remuneration alternatives don’t look that much better.
“It is difficult to find a perfect model that completely removes risk and yet continues to provide customers with the service they value and at a price point they can reasonably afford,” James Hickey, a financial services partner at Deloitte, told MPA.
“What is important is to become more aware of what and when certain structures risk poorer outcomes. Mitigants to safeguard against such outcomes will be essential. It will also be necessary to regularly monitor them.”
Hickey said that with lenders addressing the core ‘hygiene’ factors identified in the ASIC and Sedgwick reviews, such as the removal of both soft-dollar payments and volume-based incentives, the industry has shown that it’s making progress in improving the system. However, if any further changes to remuneration are recommended, the impact on the viability of the broker channel, competition, and consumer choice will need to be carefully considered.
“It is difficult to find a perfect model that completely removes risk and yet continues to provide customers with the service they value and at a price point they can reasonably afford” – James Hickey, Deloitte
“While commissions are not perfect, for the reasons outlined in the ABA and the royal commission, the move to a flat-fee structure also has its issues. Treasury also highlighted this,” Hickey said.
While the banks’ actions on commission seem to demonstrate one thing – that they’re keeping in line with the CIF recommendations and not going too far – some of their CEOs’ comments suggest another.
In CBA’s submission to the royal commission’s interim report, it said that any commission changes that went beyond the CIF proposals would need to be made through legislation and “should occur after industry consultation”. But during the last round of public hearings in November, it was revealed that the bank’s CEO, Matt Comyn, had previously been supportive of a flat-fee model for brokers and had in fact wanted to introduce that structure in February 2018.
If the industry is going to avoid such drastic measures, it needs to prove that the CIF proposals are strong enough to contend with the conflicts-of-interest issue.
Industry analyst and Digital Finance Analytics principal Martin North is sceptical about the changes. “My own view is that there is still conflict, and even if disclosed more fully, conflict remains,” he says. “It seems to me that we need to consider a fee-based service, rather than commission-based, with no trail. Then it’s a question of whether the consumer or the bank pays the fee for the advice offered. But as soon as the payment is linked to a specific loan purchase transaction, and especially if directly or indirectly linked to the size of the loan, then there is a conflict.”
Exploring the alternatives
Suncorp said that implementing a flat-fee or borrower-payment model – or removing commissions altogether – would render the broking industry unviable, contrary to consumers’ best interests. The non-major bank suggested that “a system of standardised payments to brokers” might be a valid alternative. That would see brokers paid an industry-standard percentage or fixed amount for each loan of the same type brokered by them, irrespective of the lender.
“It seems to me that we need to consider a fee-based service, rather than commission-based, with no trail” – Martin North, Digital Finance Analytics
“This would remove the possibility of brokers being incentivised to prefer the bank which paid the highest commission and instead provide a simple, transparent system of broker commissions that is easy for customers to understand,” Suncorp wrote.
AFG also suggested this as a possible way of preventing lenders from competing for brokers. “Such an approach would go a long way towards eliminating the ‘lender choice conflict’ identified by ASIC,” AFG said.
The banks have made their first move in tweaking commissions, and brokers, aggregators and associations have lobbied for the remuneration revamp to pause there. With the submissions in and statements made, there’s nothing left to do but wait.