Commonwealth Bank baulked on commissions ban

CBA was just a week from axing mortgage broker commissions earlier this year, before retreating from the proposal.

Commonwealth Bank CEO Matt Comyn. Picture: Hollie Adams

Commonwealth Bank was just a week out from enacting a secret plan to axe mortgage broker commissions earlier this year, before retreating from the proposal — largely on fears other lenders wouldn’t follow.

Documents tendered to the Hayne royal commission yesterday showed Commonwealth Bank chief Matt Comyn had undertaken due diligence and extensive modelling on a move away from broker commissions and had decided to pull the trigger on the plan.

If other lenders followed CBA’s lead the bank estimated it would have saved about $197 million in commission payments cumulatively over several years.

“Yes I had moved to a firm recommendation,” Mr Comyn told the royal commission of his plans, adding the bank had “real doubts” about whether competitors including ANZ and National Australia Bank would follow. That could lead to CBA “suffering material degradation in (mortgage) volume”.

“It would certainly have been a high-risk move to try and reshape the industry by ourselves,” Mr Comyn said.

His comments came in the opening week of the final round of the Hayne royal commission, where Mr Comyn faced a series of blistering questions. Among revelations during the Sydney-based sessions, he implicated former chief Ian Narev for failing to eliminate products that delivered little value to customers.

He also revealed that senior staff made clear that many of the concerns later raised by the banking regulator in a damning assessment of CBA’s culture were grievances they had already tried to communicate.

Mr Comyn, the first big four bank chief executive to face the royal commission, also revealed under questioning that CBA had modelled a range of scenarios and believed some of the $197m in commission savings could be passed on to customers through lower interest rates.

Mortgage brokers typically earn an upfront commission on home loans and a trail commission annually over the life of the mortgage. The Hayne interim report outlined, however, that the ­commission structures often led to poor outcomes for consumers.

“Value and volume-based remuneration for intermediaries in the home loan industry has been an important contributor to ­misconduct and conduct falling short of community standards and expectations and poor customer outcomes,” the interim report said.

The documents tendered by CBA to the royal commission showed how well advanced the plans were.

“Over the next week we will engage with key stakeholders, ­including the Australian Securities & Investments Commission, government, the Australian Bankers Association, and consumer groups who we expect to be ­broadly supportive of our position.

“In contrast, we expect broker head groups to be vocal and emotive.

“ … internal communications and briefings will be released to coincide with our public statements April 19.”

CBA’s strategy involved a so-called hybrid model where it would allow the grandfathering of trail commissions for existing home loans and also provide a “transition payment” to brokers it deemed high-quality.

That was seen as a first step towards eventually moving to a favoured fee for service model, which is currently used in The Netherlands.

The plans were shelved at the eleventh hour by CBA after further assessment.

Mr Comyn admitted yesterday that brokers could also try to game the system, if trail commissions were scrapped altogether, by splitting loans into smaller portions and making multiple applications.

He said currently “there is not a plan” at CBA to change broker commissions as he believes regulatory oversight of any change is required.

In further questioning on the home lending market, senior counsel assisting the commission Rowena Orr QC prodded Mr Comyn about CBA’s historically high reliance on the benchmark Household Expenditure Measurement (HEM).

Ms Orr cited data from October last year that put CBA’s reliance on the HEM measure at 75 per cent of home loans written. The benchmark has come under fire for not including enough of a household’s expenses, therefore potentially inflating the amount that can be borrowed.

“I acknowledge that the level of HEM usage as a prudent floor at that point in time was too high. It is lower now and needs to continue to become lower during the course of the months ahead,” Mr Comyn said.

He told Ms Orr CBA’s reliance on HEM was “coming down each week” and the bank had increased its expense fields to 11 in an attempt to move to a more conservative serviceability assessment.

“I would certainly like to see it in the 50s (50 per cent range) very soon and am very confident it’s going to be at that level very soon … somewhere around 40 or 50 per cent should be largely reflective of the underlying expenditure.”

The royal commission also heard that PwC Australia conducted a review of CBA’s loan serviceability last year. Other lenders are also moving away from HEM as part of a broader tightening of credit standards that has contributed to slower home loan growth.

Separately, Mr Comyn used the commission to admit that it was “regrettable” that CBA had only identified four of 21 issues raised about its compliance and governance structures by the prudential regulator in a deep dive on the bank earlier this year.