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Sunday 23

September, 2018 7:21 AM



Australian banks scrap commission-focused mortgages

Australian banks scrap commission-focused mortgages

Major Australian banks have taken another step toward reforming the financial sector in the wake of the Royal Commission inquiry into misconduct as they cease all bonuses aimed at rewarding the volume of mortgage loans sold.

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By Oliver King 28.08.2018

Major Australian banks have taken another step toward reforming the financial sector in the wake of the Royal Commission inquiry into misconduct as they cease all bonuses aimed at rewarding the volume of mortgage loans sold. 

In an admission that the practice only enabled a culture of overselling as well as excessive borrowing from homeowners who could not meet high-interest repayments, banks are looking to shed the image of any malpractice amid stricter regulatory scrutiny.

The Royal Commission inquiry has already uncovered several national scandals in the finance industry and has sanctioned several high-profile executives. Shares have dropped, and public trust in the industry has evaporated.

The inquiry is now set to move on to the life insurance sector, which also faces allegations of serious misconduct.

Mortgage brokers are finding themselves in the same crossfire afflicting many major banks, as it emerged that they rake in some $2.4bn a year in commission alone from these banks. Hearings revealed that the brokers were well-rewarded for every mortgage that was signed on the dotted line rather than for enabling quality financial investments with less risk of default.

One review led by the Australian Securities and Investments Commission (ASIC) showed that there was a clear conflict of interest in allowing this culture of reward for putting high-risk strategies in place, and if homeowners took out loans that they were unlikely to be able to repay easily, then this should not see the brokers being congratulated as a result.

A cross-industry body has since come out and confirmed that the financial sector is already phasing out these elements, which they class as “volume-based” and “campaign-based” commissions.

The Royal Commission also levied the allegation that these operations by the banks and mortgage brokers were not in the interests of the community, and given that the levels of trust between the average citizen and major banks has been so heavily eroded, it was essential to act.

Anna Bligh, Chief Executive of the Australian Bankers’ Association, said that encouraging customers toward high-risk loans was not a good practice, and allowing homeowners to simply borrow more as a result has led to the economic uncertainty that threatens a new mortgage-lending crisis.

She said: “These types of payments present a risk that brokers will place customers with lenders for the wrong reasons.” Bligh was happy to see serious and concerted efforts in the industry to lead the way in making changes before they became enforced and to “ensure Australian citizens are receiving high-quality advice.”

Meanwhile, Peter White, Executive Director of the Finance Brokers Association of Australia, said that this decision was the best way to begin restoring trust in banks from within communities, which will be essential to seeing healthy levels of borrowing in the future.

White said that this demonstrates the industry’s “commitment to change while also maintaining healthy competition” and is a welcomed public display of intent.

The combined industry forum released a progress report today that shows what brokers are planning to do to show that they are learning the lessons of the scandals that dogged parts of the industry in this last decade. These changes include the introduction of a “customer-first duty.”

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