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Mike Felton sits down with Australian Broker to discuss his first year as CEO of the MFAA
Mike Felton has been the head of the MFAA for just over a year now, and he still lies awake at night thinking about brokers and their businesses.
Felton has steered the association through an exceptionally busy and tumultuous year on the regulatory front following the publication of ASIC’s Review of Mortgage Broker Remuneration and Stephen Sedgwick’s Retail Banking Remuneration Review, and through the formation of the Combined Industry Forum (CIF) and its package of reforms.
In an interview with Australian Broker, Felton recalls sitting down and reflecting on the industry before taking the job. It occurred to him then that while it was an important industry full of smart and dedicated people, it could also be an industry divided.
“I realised very early on that that type of situation going into a year of unprecedented regulatory change was a great risk, so a lot of my early focus was not only on realigning the MFAA but on ensuring that I did all I could in an attempt to unite the industry in the way that it has approached this task,” he says.
He took an active role in uniting the industry through the establishment of the CIF, an unprecedented collaboration between multiple stakeholders, including lenders, brokers, member associations and consumers.
“That coming together of the industry was without a doubt the highlight of last year from my perspective,” he says.
Now back from summer break, Felton is ready to go to bat for the industry once again, and it doesn’t look like his and the MFAA’s work is going to let up. In February and March, the association is hosting a number of PD days that feature a regulatory panel discussion to delve into the changes in further detail; the banking royal commission, which will now include brokers; the ongoing implementation of the CIF reforms; and the creation of an ASIC-approved industry code.
Despite what’s to come, Felton says the MFAA will continue to “aggressively advocate” and engage with all stakeholders in the industry, including brokers, aggregators, lenders and consumers, to drive sustainability and growth.
“We do represent the entire industry, but we are cognisant of the fact that individual brokers generally do not have their own seat at the table.”
Behind the CIF reforms
Following the release of the ASIC and Sedgwick reviews last year, the industry was at a crossroads.
It faced the potential of considerable change with a wide variety of outcomes, many of which could have been potentially negative for the industry, Felton says.
Self-regulation was considered the best way forward, and so the CIF was born in May to develop a package of industry-led measures to address ASIC’s concerns.
“Self-regulation is a highly empowering process in that we as an industry get the opportunity to use our collective knowledge and experience to have the first crack at promoting stronger consumer outcomes and thus protecting our own long-term interests,” Felton says.
The CIF had to act quickly to prove to the government that it was serious about its own initiative. Meeting for the first time on 9 June, the group held monthly meetings thereafter and formed specialist working groups. Six months later, on 11 December, the group released its six-point reform package.
Those six principles include a standard commission model that avoids financial incentives that encourage consumers to borrow more than they need or will use by basing commissions on facility drawdown net of offset; ceasing volume-based and campaign-based commissions paid by lenders and aggregators; and providing ASIC and consumers with clearer information and data on loans written and commissions paid.
Several remuneration models were assessed, including a consumer-paid fee for service, base commissions paid on LVR, and a flat lender fee, but these were deemed to have unintended consequences.
“We walked a fine line here between trying to ensure that brokers were awarded for the economic value that they produce, but at the same time meeting the non-negotiables that were put forward by ASIC,” Felton says.
One of those was ensuring that lenders did not structure their incentives in a way that encouraged the creation of larger loans with large initial offset balances.
In its submission to Treasury, the MFAA’s initial position was to ensure brokers were rewarded in circumstances where funds held in an offset account were subsequently used. However, Felton says the collective view of the CIF was that that did not sufficiently address ASIC’s recommendation on the matter. The group opted for upfront commission to be paid on utilisation of the facility limit drawn down and net of offset account balances.
“While everyone recognises that the use of offset is a legitimate choice for customers, one that minimises interest and tax, we had to deal with the guidance provided by ASIC,” Felton says.
The CIF stakeholders had to work together and compromise, which is what these processes are all about, he says. In the end, they came up with reforms that Felton believes will have a “manageable impact on brokers”.
More broadly, while the changes relate to improved governance and standardisation of various documents, and processes will take time to implement, the end result should save time and strengthen the industry in the long term.
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While the preparation of the CIF report was a significant task, “the bulk of the work still lies ahead”, Felton says. The CIF’s reform package is expected to be implemented in its entirety by the end of 2020.
In the meantime, there are shorter-term milestones to be achieved. This year, the group will provide further detail on the reforms, consider unintended consequences, and begin implementing changes to commission structures and the eligibility of non-monetary benefits, as well as implementing a public reporting framework. While doing so, it will continue to consult with various stakeholders.
As these are steps the industry has taken on its own as part of self-regulation, they do not need government approval to begin. However, while the CIF can make recommendations, in accordance with competition law it cannot dictate how lenders should proceed. It’s now up to the banks to put the CIF’s principles into practice.
“Whilst the CIF has provided common principles as to how industry participants may address risks highlighted by ASIC when it comes to commission structures, it is up to each individual lender to decide how they will apply those,” Felton says.
ANZ is the only major bank so far that has publicly announced its amendments to remuneration, which will see the bank pay brokers an upfront commission of 62.5 basis points effective 1 February, up from the current 57.5 basis points.
Under the new structure, ANZ will no longer give brokers volume-based incentives. Its trail structure remains the same.
Forging ahead
It’s not only going to be a busy year for the MFAA but also for brokers. Felton recommends brokers read the CIF report and watch the video the group has prepared to ensure they understand the proposed changes. The video is available to members on the MFAA and FBAA websites. He also suggests brokers actively engage with their association, aggregators and lenders to take advantage of the resources available and to remain abreast of the changes and their likely implementation.
As the industry evolves and demonstrates what it’s capable of through self-regulation, Felton’s ability to be a scrupulous mediator will likely be more important than ever.
