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Dalton says ‘flat fee’ model could hurt consumers

This article originally appeared in ‘The Adviser’ on 25/7/17, written by James Mitchell.
Original article >

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Mortgage industry figure Kym Dalton has outlined a number of issues with the proposed flat-fee broker remuneration model, arguing that it “could be opaque” and vary from lender to lender.

In recent weeks a number of Australian consumer groups, such as CHOICE, have slammed lender-funded broker commissions. At least one group says that broker remuneration should mirror the Future of Financial Advice (FOFA) reforms and migrate to a borrower-paid fee-for-service model.

As consumer groups attempt to portray brokers as commission-hungry predators, Mr Dalton points out that competitive and regulatory pressures have seen upfront commissions and trails paid by “mainstream lenders” converge over time.

“They are reasonably homogenous these days,” he said. This means that brokers have little or no incentive to “adverse stream” borrowers to loans that did not suit a consumer’s needs and objectives as the broker chased higher commissions.

“The preliminary discussion about flat fees paid by lenders is very light on detail as to the metrics that would determine the size of scope of the lender-derived ‘flat fee.’”

Mr Dalton pointed to item 17 of the ABA-funded Sedgwick report, which states that an alternative to a value-related commission, therefore, might be fees for service paid by the bank but set either as a flat amount or related to the characteristics of the borrower.

“At this point and elsewhere it says that the ‘flat fee’ (a de facto fee for service arrangement) must be paid by the lender – but it doesn’t say why,” Mr Dalton said.

“The report does say that banks, as soon as possible, should move to adopt ‘an alternative payment system’ for brokers – i.e., not commissions based on the size of the loan as a singular metric.”

Commenting on the ASIC review of mortgage broker remuneration, Mr Dalton said the document doesn’t actually come out and say that the current upfront and trail commission payment arrangements definitively produce poor consumer outcomes.

He believes it is quite possible that, “lenders being lenders,” the flat-fee proposals could become a new battleground for broker market share or “amend risk profiles, producing poor consumer outcomes by encouraging brokers to ‘adverse stream’ to the lender paying the highest flat fee.”

Critically, Mr Dalton says that the existing commission structures have become transparent over time, whereas a new remuneration model would be untested.

“It’s possible that the proposed flat-fee arrangements, particularly if accompanied by a complex set of metrics that determined the fee, could be opaque and with wide variance from lender to lender, impacting consumer outcomes and making it more difficult for ASIC to provide regulatory oversight that ensured sound consumer outcomes.”