CoFI has been designed to introduce a new conduct regime for the financial sector, but will also grant lawmakers the ability to regulate the incentives that are paid or gifted to intermediaries.
The bill follows the FMA and Reserve Bank’s joint review into the conduct and culture of banks and life insurers, and Australia’s Royal Commission into financial services.
MBIE’s preferred option, outlined in a recently-published discussion document, is to prohibit incentives paid to brokers based on specific sales or volume targets, that could lead to a conflict of interest.
MBIE has suggested that linear sales incentives – such as the percentage fee paid to brokers for settling a loan, and trail – will not be banned under the new bill.
According to David Ireland, a partner at law firm Dentons Kensington Swan (pictured), MBIE has given a “clear signal” that commissions paid for arranging a home loan, and trail, will not be prohibited.
“There has been confirmation that linear commission is not seen as a problem, as long as it does not reach levels that are outrageous that distorts behaviours.”
Ireland played down concerns from brokers about the impact on traditional commission structures.
“I have heard concerns from some mortgage brokers that this is going to force them to charge fees to their client as they won’t be getting paid by the banks. That is not the case. The regulations explicitly recognise a place for commissions. But the problematic ones have been singled out, such as target based incentives.”
According to Ireland, the changes will spell the end of banks enforcing targets on brokers. Banks will no longer be able to force advisers to place a certain amount of business to retain their accreditations, or provide bonuses or prizes to advisers that place the highest volume or value of loans.
“For any mortgage broker that is driven by meeting targets for hitting a particular level of volumes, that driver will be removed from the market,” he said.
Advisers have expressed fears that the new bill could lead to a creeping government influence over commissions, paving the way for more radical changes in the years to come.
Ireland said that while the new bill gives MPs the power to further regulate commission structures, future changes will be bound by strict parameters.
“Ministers need to ensure that any further regulation around incentives does not duly impact the availability of financial advice, and put mortgage advisers out of business,” Ireland said. “Advisers should take comfort from that level of protection.”
