Sydney-based research firm Rice Warner has called for mortgages to be reclassified as financial products in the Corporations Act. The firm also called for broker remuneration to undergo FOFA-style reforms.
In an article entitled Governance of Mortgage Brokers, published last week, Rice Warner criticised aspects of the mortgage broking industry in light of the Australian Securities and Investments Commission’s (ASIC) remuneration review, released in March. The deadline for submissions regarding ASIC’s findings were due last Friday.
Rice Warner believes the structure and operation of the mortgage market is very similar to that of the financial advice market before the introduction of the Future of Financial Advice (FOFA) reforms, and has called for similar reforms in the mortgage broking industry.
“ASIC has made three proposals for the reform of remuneration structures, including improving the commission model, and moving away from volume bonuses and soft dollar payments,” Rice Warner said. “Unfortunately, these proposals do not contain any firm recommendations. They simply defer to the Australian Bankers’ Association review into remuneration structures currently underway. We believe that this is insufficient and that ASIC should have articulated firm principles that it expects to be implemented.”
Rice Warner further argued that the principles and provisions established by the FOFA reforms in respect to remuneration, and especially conflicted remuneration, should have been the benchmark upon which ASIC had based its proposals.
The firm said “outlawing commissions” should be a consideration, as commissions create a “poor alignment of interests”. In the absence of lender commissions, Rice Warner said brokers should be able to charge an establishment fee, which could be charged at the time of the transaction.
The research firm is also highly critical of trail commissions. “[They] make no sense for consumers – imagine what consumers would think if the real estate agent selling a home received a trail commission on the transaction.”
Rice Warner pointed out that ASIC’s review into mortgage broking remuneration avoided assessing the form and quality of advice provided to borrowers. Mortgages are nearly always associated with the acquisition of a long-term asset, either directly by purchasing a residential or business property, or indirectly by utilising collateral in a property to invest in other assets.
“In conjunction with their collateral asset, mortgages are equivalent to other long-term investments and require equivalent advice, especially in relation to long-term risks,” the firm said. “We do not consider that brokers can act in the best interests of consumers if mortgages are assessed and advised similarly to consumer credit products with a focus on short term income and expenditure. This is particularly the case given the review’s finding that brokers and lenders did not make sufficient inquiries into consumers’ expenses.”
Rice Warner believes that consumers’ interests would be best served by reclassifying mortgages as financial products under the terms of the Corporations Act.
“This would immediately and definitively address the issues related to the levels of remuneration and the conflicts of remuneration,” the company said. “It would also address the quality of advice, the qualifications of brokers, the oversight and disclosure regime, and the need to act in consumers’ best interests. It would also recognise mortgages for what they are, long-term financial instruments, and not simply consumer credit.”