"How does a bank enact the additional obligations without negatively impacting the customer experience?"
A broker and two lenders explain how the cooling property market and royal commission are affecting SMEs
- 2018 Commercial Lenders Roundtable
- Top 10 Brokerages 2018
- 2018 Brokers on Aggregators
by Edward Cranswick
With the royal commission’s final report coming just around the corner— and potentially significant changes on the horizon for mortgage brokers’ remuneration— MPA looked at how brokers and advisers around the world earn their pay.
A background research paper prepared for the royal commission examined the nuances of the various structures.
So, how do they get paid?
The Netherlands has banned all manner of commissions to investment advisers, including mortgage brokers; and financial institutions that give investment advice or asset management services are allowed only to receive awards or compensation directly from clients. By putting a price on the services provided by the in-house bank adviser, this should help level the playing field for independent advisers.
While the United Kingdom banned most commissions paid to investment advisors, the ban does not extend to mortgages and insurance.
In the United States, broker-dealers are required to disclose the source and amount of third-party remuneration to customers, so they’re informed about the potential nature and extent of their conflict of interest. Investment advisers also have a fiduciary duty to act in their clients’ best interests, another matter that is being considered by the royal commission in Australia.
Probably the most interesting comparison, though, is with New Zealand, which recently considered the merits of moving away from a commission-based structure for mortgage brokers.
In New Zealand, commissions are not banned, but must be properly disclosed. A recent review of financial advice laws, conducted by the Ministry of Business, Innovation and Employment, addressed the question of whether commissions ought to be banned.
While it acknowledged that banning commissions was a more direct method of ensuring consumers were protected from conflicts of interest, it decided that a ban was not the proper solution for New Zealand. The Ministry was concerned that banning commissions would lead to an undersupply of mortgage brokers and limit their availability.
“There is a significant risk that banning commissions in New Zealand (where people are already reluctant to pay for financial advice) would further limit access to advice.”
Interestingly, the Ministry also noted that banning commissions would not address perverse incentives that operated through in-house distribution channels (i.e. banks selling their own mortgage products).
“It would not address conflicts of interest where financial products are sold through in-house distribution channels, such as bonuses (and may increase the prevalence of such conflicts of interest since there would likely be a significant increase in advice provided through in-house distribution models).”
While the NZ Ministry noted the trend towards more direct interventions, such as bans on commissions, it instead opted for increased scrutiny and regulatory procedures, including:
- clearer obligations on advice givers;
- improving monitoring mechanisms; and
- requiring clear and consistent disclosure for conflicts of interest.
With New Zealand and Australia’s broking systems sharing the most similarities out of all the countries examined, this could be our best guess as to how the royal commission moves.