Proposals to make mortgage advisers disclose commissions are a good thing that will help protect both advisers and consumers.
A recent discussion document from the Ministry of Business, Innovation and Employment – which proposes that advisers disclose information about fees and commissions – will encourage more transparency in the process, and is something that SCP already have insisted on in all our documents; mortgage advisers already adhere to these conditions when dealing with SCP.
The proposals however, could go further.
A borrower visits a mortgage adviser in the expectation that they will receive impartial advice on what is best for them. But there is a reasonable argument an adviser’s judgement could be clouded by the relationships they have, as well as incentives and perks, like rugby tickets and holidays.
I also know of mortgage advisers who are fearful of the repercussions they face when they don’t give a bank a certain volume of business. Some banks expect a certain level of business from an adviser, or that adviser is struck off their books – how is that fair to the borrower or adviser?
In this case, the adviser is unfairly pressurised and the borrower is not getting the advice or service that they think they are getting.
Let’s face it. Not all mortgages are created equal. Borrowers could end up with a structure that doesn't suit their needs as well as it could have. This may include higher interest rates, being stuck in an unsuitable fixed or floating agreement and even renewal fees.
There are certain non-bank lenders who will offer deals with three-month renewal terms, knowing that the borrower needs nine months, for example – that means the borrower must pay two sets of renewal fees instead of one.
Policing a thorny problem
The problem lies with policing disclosure requirements. It will be very difficult because whoever is tasked with monitoring ‘disclosure’ requirements will need to be effective and switched on to changes in incentive structures when things like, for example, commission fees suddenly become paid holidays.
The proposal from MBIE raises a number of questions, including who will be responsible for disclosure, who will police disclosure and what incentives will be included in disclosure? The question that needs to be asked is always ‘is this in the best interests of the borrower?’ If incentives or perks are involved then best judgement can be clouded. Almost all our referring advisers are invested only in the best outcome for their client and as such are not influenced by personal sweeteners, although we are aware many other advisers still are.
I think potentially the advisor aggregator groups, being the larger co-op’s most mortgage advisers belong to, are in the best position to monitor disclosure because they already provide various forms of governance for advisers to operate within. Disclosure may be an extension of that.
Whoever polices disclosure will need to come up with a structure that can query why certain deals went to certain lenders when they did. They would need to ask the question, ‘is this in keeping with what other advisers would do?’
Unfortunately, at the moment, most of these things run on a ‘wait for the complaint’ model, but when the public doesn’t know they have the basis for a complaint, that’s not going to happen. You don’t know what you don’t know.
Another approach may be to require the lender to tell the borrower – in the contract – what they are paying or giving to the adviser. Again, this would need to be closely monitored.
Lenders need to tell the public if they are putting pressure on the broker to deal with them. Unfortunately, this is not an uncommon practice in the industry currently, and it’s unfair on the adviser.
I don’t think there is a risk that the public will perceive advisers as more expensive than some lenders if advisers are required to disclose commissions. The public already knows they get paid a commission – it’s nothing good communication won’t solve.
The contracts that Southern Cross Finance issues already inform clients that they are paying a fee to the mortgage adviser – including the stipulated amount – for accessing the peer-to-peer short-term mortgage loan product.
We assist people in a particular transaction for a particular stage and all our deals incorporate an exit plan, whether that’s the sale of an asset or a refinance to another provider who provides longer term commissions.
When it comes to a Southern Cross Partners short term mortgage deal, the borrower pays the fee and they are informed upfront about that.