Dinners at the Playboy Mansion in Beverley Hills, private parties at Spanish resorts in the company of chart-toppers such as Groove Armada, and exclusive tours of the Mediterranean – these are just some of the rewards enjoyed by mortgage brokers at Australian Finance Group (AFG), the country’s largest mortgage broking network.
So, how does an AFG mortgage broker get a ticket to these lavish events? Well, it’s simple, really. They flog more AFG-branded home loans and the chairman of the company then invites them to attend.
Don’t believe us? Here’s a video of how AFG induces its “superstar” brokers to lump clients with its home loans.
Volume-based remuneration is thriving at AFG and across many other parts of the industry.
While new consumer protection laws require mortgage brokers to observe “responsible lending principles” in the loan recommendations they make to borrowers, it has not stopped lenders from crafting incentives that work against the spirit of the legislation.
National Australia Bank and Westpac also throw volume-based rewards at brokers for stapling new borrowers to their loan products. But these big banks wave less exotic incentives than AFG, relying mainly on their favourite commodity — cash — to corrode the independence of the profession.
Consumer advocates say it is a disturbing trend and warn that mortgage brokers are feeding on the same destructive remuneration practices that drove Commonwealth Bank advisers to impoverish the lives of thousands of wealth management clients.
“Volume bonuses are yet another incentive on brokers to sell you a loan that might not be in your best interest,” says CHOICE spokesman, Tom Godfrey.
“It is concerning to think mortgage brokers are not obliged to comply with the obligation to act in a client’s best interests under the Corporations Act.”
The problem at AFG
AFG wields market influence over more than 2000 brokers operating in Australia. Within banking industry circles, the service that AFG provides is known as an “aggregation platform”.
As an aggregator, the company provides a pool of services that reduce the paper work and compliance costs of brokers. The services are delivered through a computer network owned by AFG and the brokers pay monthly fees.
When loan deals are processed through its computer platform, AFG receives commissions from lenders.
Most of the commission money is then distributed to the brokers who originate the loan business, but AFG keeps a portion for itself.
According to its 2013 financial accounts, AFG harvests more than $300 million through these commission arrangements annually.
AFG also selects the home loan products that can be marketed by these brokers to clients. While most banks are represented on the panel, many small lenders – particularly credit unions – are excluded.
At the moment, AFG has 31 lenders on its panel, including its house-branded mortgages.
By offering special volume-based incentives for brokers to sell its own home loans, AFG induces brokers to recommend its mortgages over other lenders on the panel.
In the case of brokers who like free holidays, AFG’s incentives have the effect of making the home loans offered by rival lenders less competitive in terms of how brokers are paid.
NAB’s sales-driven culture
NAB owns three aggregation businesses that compete with AFG. They operate separately under the banners of Fast, Choice and Plan.
Together, these platforms provide support to thousands of brokers who pay monthly fees to use the service.
NAB’s head of retail banking Gavin Slater boasted earlier this year that his bank did not pay volume based commissions or sales bonuses to brokers that use Fast or Plan.
This is what he told Fairfax business journalists in June:
“At the end of the day brokers are there to be independent and to give their customers the best advice,” he said “And when you’re paying volume based bonuses to aggregators, I have a question around that.”
Well, guess what? NAB also offers volume based incentives to brokers.
Mortgage brokers using the Plan and Fast platforms are eligible for cash discounts on the hefty service fees they pay if they meet monthly sales targets on NAB home loans.
Industry sources say the incentive can wipe tens of thousands of dollars from the annual costs incurred by brokers.
Mark Haron, the principal of Connective, an aggregation provider that competes against Plan and Fast, says the discounts are significant for some brokers.
“Yes, we have seen instances in FAST and PLAN where some of the brokers have been offered incentives around their aggregation fees and it is linked to them selling more of their NAB-based products,” he told The New Daily.
“For the small number of brokers that we’re aware of this being offered to, the value of these incentives is estimated to be potentially worth over $20,000 a year.”
Incentives “in customers’ interest”: NAB
In response to questions from The New Daily, a NAB spokesman confirmed that NAB provides these special rewards to brokers for selling its mortgages. However, the spokesman questioned whether the fee discounts exceeded $20,000.
“We believe the incentive structure between NAB-owned aggregators and brokers is fair to all parties, fully transparent and importantly, in the best interest of customers,” a NAB spokesman said.
“Plan, Choice and Fast each have very strict guidelines in place with Brokers across their networks to ensure all commissions and incentives are disclosed to customers.
“Brokers also have a responsibility to meet their National Consumer Credit Protection obligations to ensure a product recommended is not unsuitable.”
Mr Haron said the Connective business, which is 25 per cent owned by Macquarie Bank, does not offer bonuses or fee discounts to its brokers for selling Macquarie-branded loans.
“We don’t have any such arrangements with Macquarie,” he said.
Westpac loads up
Westpac does not operate an aggregation platform, but in recent years it has resorted to topping up commissions it pays to brokers who meet specified monthly sales targets.
In a memo sent to brokers on 30 January, Westpac announced it was amending its standard commission structure to include “additional volume based incentives”.
The effect of the change was to increase the up-front commission paid to brokers on Westpac loans to 0.65 per cent from 0.5 per cent.
This increase meant that brokers received an extra $450 on a $300,000 home loan settled with the bank.
The total upfront commission paid by the bank on such a loan rose from $1500 to $1950.
Industry needs to clean its act
The Financial System Inquiry chaired by David Murray has spotlighted the mortgage broking industry as an area that may be ripe for reform.
In his interim report Murray noted that the structure of the industry, where banks such as NAB own aggregation platforms, has “the potential to distort the way in which mortgage brokers direct borrowers to lenders”.
The prevalence of volume-based remuneration outlined in this article suggests that distorted advice is a working feature of the mortgage broking sector.
Moreover, aggregation firms such as AFG, which exclude small lenders from their panels, can be seen to be limiting competition in the market.
While consumer advocates are pushing for the abolition of all volume-based incentives in the sector, the peak body for mortgage brokers wants the existing arrangements to stay in place.
“What mortgage brokers have to do is more than disclose what they get from lenders,” says Phil Naylor, CEO of the Mortgage and Finance Association of Australia.
“They have to ensure that any conflicts they have are not causing disadvantage to clients and that is a higher level of responsibility than what applies to financial planners.”