FBAA defends commission model to Senate inquiry


1 May 2017


Annie Kane




The industry association has defended the current broker commission model to the Senate economics references committee and warned that switching to a flat fee model could lead to “extremely poor consumer outcomes”.


At a public hearing in Sydney last week, the executive director of the Finance Brokers Association of Australia (FBAA), Peter White, was questioned on the Australian Securities & Investments Commission (ASIC) report into remuneration and whether there were any poor consumer outcomes happening in the broker sector.


Touching on the ASIC recommendation that lenders “change their standard commission arrangements so that brokers are not incentivised purely on the size of the loan”, the senate questioned whether fees for service, rather than commissions, would be a suitable alternative.  However, Mr White told the senators that this would not be in the best interest of the consumer.


Speaking to The Adviser after the inquiry, Mr White said: “We discussed and debated as to why wouldn’t you have a flat fee model or a slightly tiered model.


What I presented to Senate was that, when you do that (let’s say it’s a $200,000 loan and the fee is $3,000 per loan, whereas the broker would normally get something like $1,200 of commission), the outcome is that the banks would say that’s not acceptable because they lose money on that and their costs increase. So, they end up putting up interest rates to compensate [and] that would be an extremely poor consumer outcome.


“The flat fee model has a whole host of issues under it but that is one of them. The key thing there — and the key thing for our industry — is to constantly validate that what we do creates good consumer outcomes and not poor ones. They were trying to identify whether there are poor consumer outcomes happening in the broker sector, which obviously, I very strongly said 'no' to so many times, I couldn’t count them.”


Mr White also told The Adviser that the Senate was trying to understand whether the fact that brokers are writing larger loans with higher LVRs and more arrears than the direct channel (as per the ASIC report finding) could be leading to poor consumer outcomes. 


“The Senate was very focused on trying to drill that as proof of poor outcomes to borrowers, but the big thing that comes off the back of this is that the borrowers are never asked whether this was a bad outcome in getting their loan — that question is never asked. The Senate inquiry or anyone else cannot make assumptions that this is the case because they don’t know; it’s not proven.  


“So, you cannot make determinations on bad consumer outcomes based on those assumptions if you do not have proof that what you're saying is actually right. And, if you don’t ask the question, you can’t turn around and make legislation off the back of it or change legislation,” he said. 


The executive director of the association was also asked about his thoughts on the Sedgwick Review, to which he said he was “not a fan”, because it was “not written by someone who has the relevant professional qualifications to make the recommendations”.


He reportedly told the committee that he was dubious of the banks supporting the Sedgwick Review findings so quickly, revealing to The Adviser: “I told the Senate inquiry that this leads me to ask: 'What's the hidden agenda here?'  They're trying to manipulate a process to short circuit due process that must be afforded to anyone in this country. Due process must be given and I said very firmly to the Senate inquiry that they must let due process happen and not let the banks railroad the system and manipulate outcomes.”


Importance of engaging politicians


Mr White said that he was glad to have been invited to be a part of the inquiry, as showcasing what brokers do to politicians could have far-reaching consequences.


He explained: “This is actually one of the crystal steps in what we're going through at the moment [with the ASIC remuneration review consultation]. The economics references committee has significant input into outcomes because the determination of the ASIC report and what happens to broker commissions in the future is going to be determined by politicians.


“[The ASIC consultation goes back to Treasury and] Treasury will report back to the minister [for Revenue and Financial Services] and it’s the minister that will be making decisions on this. These decisions then have to go through a parliamentary process. So, the same as what we saw in the FOFA regulations — there's a parliamentary process that this has to go through first, which winds up going through the Senate and so on, so it has to get passed and approved.


“So, while we can’t stop the outcomes from whatever they may be, we can make sure that our voice is heard at the right places. Because, it’s one thing to be talking to regulators, but the decision will be made by politicians, so it’s important we’re making our voice heard with them too.”


The FBAA was the only group representing the lending sector to be invited to give input to the inquiry. Other witnesses asked to attend the hearing were ASIC, consumer protection group CHOICE, the Financial Ombudsman Service Australia, the Consumer Action Law Centre and Financial Rights Legal Centre, and the Financial Services Council.




Proof Committee Hansard






Consumer protection in the banking, insurance and financial sector






CHAIR:  What about lenders' observance of responsible lending obligations?



Mr White:  There have obviously been some highlights today in regard to questions around that, and I do support the concerns that certain lenders are not necessarily completely adhering to the advices that are being given by ASIC. I do not know if that is because it is not coming from APRA or what the reasoning is, but that is another debate.  These are the things that I see that definitely have an influence on where we need to stand in the marketplace. Coming back to credit, from a brokering perspective, historically it has all been about the lender.  It is a policy; I comply with policy............ One of the issues is that, within the banking system, I think you will find that most credit people are not breaching policy; the problem is policy is wrong. That is where the issue needs to be investigated.