The Commonwealth Bank will disclose to home loan customers the value of commissions it pays to mortgage brokers, after being embarrassed by the banking royal commission.
A witness for the nation’s largest property lender, Daniel Huggins, told the royal commission in March the bank did not disclose the value of commissions to customers because they can’t be accurately calculated.
“We are unable to accurately calculate the amount that will be payable over the full life of the loan,” Mr Huggins said, although he conceded that the bank could disclose the upfront fees that were paid and the rate of the trailing commission.
Under the new rules, CBA will be providing details in consumer and loan contracts signed at settlement setting out how it calculates upfront and loan commissions.
It will state there is an upfront commission of X dollars and a trailing commission paid at a rate of X per cent of the balance that is outstanding at the end of every month.
In addition, there will be a separate statement that borrowers can ask their broker about “specific payments” from the brokers’ head group, or aggregator, which provide back-up services and support.
“We have enhanced our customer disclosures on broker commission payments,” a bank spokesperson said.
“These disclosures inform our customers about the commission we pay to their mortgage broker’s head group for arranging and settling their settling their home loan.
“Our enhanced customer disclosures highlight our ongoing commitment to good customer outcomes and becoming a simpler, better bank.”
Banks rely on brokers
Brokers account for about 53 per cent of property deals – and much more amongst smaller lenders with minuscule branch networks – and more than $2 billion in annual commissions.
Big four use of mortgage brokers ranges from about 56 per cent for ANZ to 42 per cent for National Australia Bank. CBA’s broker network accounts for about 43 per cent, according to Morgan Stanley.
The Productivity Commission, corporate regulators and banking royal commission are questioning whether borrowers should pay a fee to brokers rather than higher interest payments to lenders.
Royal commissioner Kenneth Hayne, QC, recently questioned whether brokers did more work on a larger loan than a smaller one to justify a bigger upfront commission and Mr Huggins was quizzed about why lenders did not provide more detail.
A mortgage broker who arranges borrower finance will receive an average upfront broking commission from lenders of about 0.6 per cent of the loan value and a trailing commission of just under 0.2 per cent of the loan outstanding per year over the life of the loan, according to the Productivity Commission.
That amounts to a mortgage advisory fee of about $6000 for the mortgage of an average loan of about $357,000.
Mark Haron, deputy chairman of the Combined Industry Forum, which represents banks, brokers, finance industry and customer-owned banks, said the sector is responsive to calls for change and is working on improving disclosure of commission payments and strengthening the fiduciary relationship between broker and borrower.
Brokers oppose fees
But many brokers are deeply sceptical of the major lenders who they believe are attempting to rebuild proprietary sales through their bank networks and sales staff.
They also claim that borrowers are already alerted to commission payments at settlement through mandatory credit disclosures.
For example, Westpac chief executive Brian Hartzer recently caused outrage amongst brokers by suggesting a service fee for recommending mortgages because of fears it will tip the balance back in favour of branch-based lending.
Bankwest, which is a subsidiary of CBA, recently announced it is restructuring payments to avoid financial incentives that encourage consumers to borrow more than they need or will use, such as basing commissions on facility draw down net of offset.
Banks have also stopped paying mortgage brokers bonus commissions based on the volume of loans sold – and by the end of the year won’t be able to spend more than $350 entertaining any individual broker at an event.
The changes are in response to the corporate regulator’s concerns that rewarding top performers with lavish trips and extra pay created conflicts of interest and encouraged customers to borrow too much.