15 March 2018Hot off the Press
On Thursday, Commonwealth Bank of Australia (CBA) executive general manager for home buying Daniel Huggins appeared before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which began its third day of public hearings.
Mr Huggins testified that commission payments made by banks to mortgage brokers can create a conflict interest: “The longer the loan takes to pay off and the larger it is, then the larger the trailing commission, and that … is a conflict between the customer and the broker,” he stated.
After further questioning by Rowena Orr QC, counsel assisting the Royal Commission, Mr Huggins acknowledged that brokers can maximise their income by securing for the largest loan possible over the longest period of time possible.
A report provided by CBA to the Australian Bankers’ Association review into retail banking remuneration found that brokered loans were associated with interest-only loans (which prolong the repayment time), higher debt-to-income levels, and higher costs for customers overall. The report indicated that volume-based commissions for brokers should be discontinued.
Mr Huggins stated that CBA has not discontinued volume-based commissions, suggesting that it would impact CBA disproportionately unless other lending institutions also committed to ending the practice.
Turning to the matter of mortgage brokers being de-accredited for not writing enough loans for CBA, Mr Huggins testified that de-accreditation of less-active brokers occurred because CBA was not confident in the brokers’ knowledge of the bank’s products and processes. This contradicts an internal CBA document that showed pressure from analysts and shareholders to increase the use of internal channels for lending — including de-accrediting inactive brokers.
Ms Orr also questioned Mr Huggins about CBA’s lax fraud and misconduct detection and prevention controls, referring to an internal audit report that described these as “marginal”. Commissioner Kenneth Hayne observed that CBA relied too heavily on the honesty of its brokers, remarking that “in respect of house loan applications, the bank depends on what the broker tells it.”
The CBA audit identified more than 4000 cases where it appeared that the borrower and broker were not in the same state or country, indicating that the requirement of a personal conversation had not been met, and calling into question the effectiveness of brokers in the verification of borrowers’ identities and documents.