How would you like to know what your mortgage broker is earning on your mortgage?
In B.C., you may soon find out. The mortgage broker regulator there plans on doing what no other major province has done: force mortgage brokers to disclose how much they’re earning from lenders on your mortgage. We’re talking exact dollars and cents.
As a borrower, many will love this concept, if for no other reason than satisfying their curiosity. Many others will use compensation information against brokers to negotiate, by asking their broker to give up some commission to “buy down” their interest rate.
It’s a proposal that has brokers in B.C. white-hot angry with their regulator. But FICOM feels an obligation to forge forward with this plan anyway. To find out why (and how), we spoke to Chris Carter, Deputy Registrar of Mortgage Brokers at FICOM to get the regulator’s position.
CMT: Chris. Thanks for sharing your thoughts with our readers. First off, can you tell us how many consumer complaints FICOM has received in relation to the matter of undisclosed compensation?
Chris Carter: The issue here is clear disclosure of conflicts of interest to consumers — and a growing public expectation of transparency in their dealings with the financial services sector. Consumers of financial products are more vulnerable than consumers of other products. Products are complex, intangible and future oriented. Consumers place a high degree of reliance on advisers to help them make an informed decision. A clear and easy-to-understand description of a mortgage broker’s interest in the transaction reduces the risk that advice to the consumer is compromised by the broker’s own interest in the transaction.
CMT: FICOM believes that hidden compensation increases the risk that brokers steer consumers into mortgages that are not in the consumer’s best interest, and I agree totally. But how exactly should consumers use the disclosed dollar amount of compensation and perks to decide if a broker is not acting in their best interests?
Chris Carter: It is up to consumers how they use the information. We have confidence that given the facts consumers will make wise decisions that are in their own best interests.
CMT: Brokers seem to view this as a major rule change with repercussions for their business. You noted that, until recently, FICOM was not seeking comment from industry stakeholders; albeit you mentioned FICOM would receive those comments. Typically, the industry is formally invited to comment on key changes affecting their business well in advance. Any particular reason why that custom was not observed in this case?
Chris Carter: We are observing that custom, and are actively consulting with MBABC, CAAMP and directly with leaders in the B.C. mortgage broker community on how best to implement the changes. The Registrar has received legal advice that the changes are necessary, and has accepted and is acting on that advice.
CMT: Invariably some consumers will focus on finding the broker who accepts the lowest compensation. Are you worried that this might cause some consumers to place less weight on advice — advice that reduces their cost of borrowing in other meaningful ways?
Chris Carter: Those consumers have made a decision to work with a mortgage broker, and in doing so clearly place a high value on the advice a mortgage broker provides. If a consumer subsequently decides that the compensation a broker receives from a lender is the most important criteria in making their decision, that is the consumer’s choice. Consistent with a mortgage broker’s value proposition, that consumer should and would still receive the best advice.
CMT: Since lenders generally pay the same base compensation, base compensation differences are typically not enough to sway a broker’s recommendation (or create a conflict of interest). As such, wouldn’t it be enough to instead disclose:
Extra compensation? For example, why not simply force brokers to disclose all consideration, perks and compensation over the standard 100 basis points on a 5-year fixed?
The percentage of a broker’s volume that he/she has sent to the chosen lender in the last 12 months?
The types of compensation and perks received, and how they are calculated?
Why would all of the above not be enough to solve the “hidden compensation” issue and bring conflicts of interest to light?
Chris Carter: The law in British Columbia requires that brokers describe to the borrower any direct or indirect interests the broker, or a related party, has or may acquire in the transaction. All of the above would be captured by that requirement.
Describing conflicts in terms that consumers can easily understand reduces the risk that brokers provide advice that is not in the consumer’s best interest. Disclosure that frames the interest as a hypothetical (for example, contingent commissions), uses industry terminology (for example, bps), or is vague and imprecise (for example, non-monetary benefits) and is not easy for consumers to understand.
CMT:How would a broker disclose a volume bonus that is contingent on her hitting a certain volume target within 12 months, if the future volume to that lender is unknown?
Chris Carter: We are consulting industry on precisely that type of question. A draft bulletin and improved Form 10 and Form 11 have been shared with CAAMP and MBABC, and we expect that the associations will identify both potential implementation challenges and solutions for our consideration.
CMT: Do you believe this rule could drive down broker compensation if consumers use this information as negotiating leverage?
Chris Carter: As mentioned earlier, it is up to consumers how they use the information. FICOM does not regulate the compensation that mortgage brokers receive for their work.
CMT: You mentioned that disclosing a dollar figure helps consumers judge the value of their broker’s services. Do you believe consumers have the expertise to put a value on advice that could save them thousands of dollars in prepayment penalties? If they cannot value something like that, how can they truly assess a broker’s value?
Chris Carter: We would expect an average consumer would use information from a variety of sources to judge the value they receive from a broker, including how well the broker communicates that value and the merits of the mortgage options under consideration. Under an improved Form 10, consumers would have additional information at their disposal to judge the value of a broker’s services.
CMT: You noted that judging value entails assessing “cost versus performance.” If the lender pays the broker, how does the consumer compute the true cost they’re paying for the broker’s services?
Chris Carter: As mentioned above, consumers are likely to use a range of factors to judge the value they receive from a broker. Clearer disclosure of conflicts of interest provides industry with an opportunity to better inform consumers of the value of their services.
CMT: How can a consumer value the broker’s performance if that performance is contingent on certain events? For example, if a broker recommends a mortgage with a favourable blend and increase policy, the full value of that broker’s performance will only be realized if the consumer increases their mortgage before maturity and saves money because of my advice. So even if a consumer judges the cost, they can’t accurately judge a broker’s value, can they?
Chris Carter: Consumers will likely continue to judge a broker’s performance in much the same way they do now — by the quality of their service and advice. In the scenario you outline, you will have provided your best advice to the consumer and clearly described your conflicts. Your ongoing relationship with the consumer and communication of your value proposition is yours to manage.
CMT: Has FICOM considered any adverse side effects of disclosing the exact value of compensation? If so, what potential side effects were contemplated?
Chris Carter: We have heard many viewpoints about the potential impact of the change. The change is necessary to align industry practices with the law in British Columbia, as mentioned earlier, and we are in ongoing consultation with industry about how best to implement the change. Consumers place great value in the services of mortgage brokers. Your success is testament to that. [A good broker’s] advantage is that [he or she] works in the best interests of the consumer and is not beholden to any one lender. Clearer conflict-of-interest disclosure strengthens that advantage and provides consumers with even greater confidence in [the broker’s] service offerings. By embracing change in British Columbia, industry has an opportunity to send a strong signal that it believes in its value proposition and understands the importance of transparency in its interactions with consumers.
Editor’s Note: Our thanks to Mr. Carter and FICOM for providing this open dialogue. CMT’s take on this issue will appear in an article to follow.