Banking inquiry: CBA knew of risks but put ‘volume’ ahead
15 Mar 2018

Commonwealth Bank of Australia (CBA.AX) Chief Executive Ian Narev knew that a system of financial incentives to reward mortgage brokers could hurt customers but failed to act, an inquiry into Australia’s financial sector heard on Thursday.

A confidential letter penned by Narev in 2017 and disclosed on the third day of the financial sector Royal Commission criticized the practice of paying brokers more for bigger loans, an incentive still widely in place including at CBA.

Instead of ordering changes to remuneration practices to protect customers from taking out loans they could struggle to pay off, CBA chose to protect “volume” in the bank’s highly lucrative mortgage business, a CBA executive said.

“We agree … that while brokers provide a service that many potential mortgagees value, the use of loan size linked with up-front and trailing commissions for third parties can potentially lead to poor customer outcomes,” wrote Narev, who is stepping down as CEO next month after a series of scandals at the bank.

Under questioning, CBA’s executive general manager home buying, Daniel Huggins, said that although Narev supported changes to incentives, nothing was done to unwind the broker commission system because the bank would lose business to rivals.

“I think we have acknowledged there is a conflict in the commission structure,” Huggins said under questioning at the public inquiry in Melbourne.

“There is a first-mover problem, in that the (bank) who moved first would likely lose a lot of volume.”

Broker payments, particularly trailing commissions paid over the life of a loan, are a sensitive topic for Australian financial institutions as the four biggest banks derived A$51.77 billion ($40.8 billion) from mortgage agents in the September quarter of 2017, according to the inquiry.

As the country’s biggest lender, CBA attracts about 40 percent of new home loans from brokers.

– By Jonathan Barrett, Paulina Duran, Reuters, 15 March 2018

Link to the Reuters article.

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