Consumer advocacy group CHOICE has defended the payment of commissions by banks to a company associated with its Big Bank Switch campaign.
CHOICE is seeking to mobilise consumers to help them drive better deals from mortgage providers, by creating buying groups to negotiate fees and pricing.
The switching program is run by One Big Switch, an entity not associated with CHOICE.
CHOICE itself receives a “referral fee” from One Big Switch, and the CHOICE website says that “One Big Switch may be paid a commission from lenders who earn the business of switchers”.
“This fee [sic] is paid by the bank, not the consumer,” CHOICE says.
CHOICE director of campaigns and communications, Christopher Zinn, says the organisation understood full well that when it set up this program the commission aspect of its structure would attract scrutiny.
But Zinn told Professional Planner that he does not think it undermines CHOICE’s credibility in calling for commissions to be banned in the financial planning industry.
“We were aware going into this that commission has been an issue we’ve been vocal about in the past, and that if we’re going to be taking commissions then we understand the perfectly fair questioning and scrutiny we we’ll be under for that,” Zinn says.
“We believe that the structure we have put in place with regards to transparency of these commissions, and the fact that there will be no conflicts of interest, is such that we are comfortable with that.
“I know that we will be grilled over this, and I think that’s quite fair enough.”
The CHOICE website says that One Big Switch will pay CHOICE “a referral fee to help cover the costs of creating and delivering the CHOICE Big Bank Switch campaign, freeing up CHOICE resources to invest in independent research and analysis of products and services”.
CHOICE says that if its fee income exceeds the cost of running the campaign, the excess will be “directed entirely to future campaigns that will benefit consumers”.
“Any fees received by CHOICE will be fully disclosed on our website and in our annual report,” it says.
Yesterday afternoon, CHOICE posted a blog on its website advising that all commissions received by One Big Switch from lenders will be fully disclosed.
Zinn says CHOICE did “broach the subject” of One Big Switch receiving a flat fee from each bank, rather than a commission, but “it’s fair enough that One Big Switch start negotiating with as clear a field as possible”.
“I think we can say that we’re content that the partnership we have with them, and the transparency that will be brought to the table, will ensure the maximum consumer benefit,” he says.
While it is not receiving commissions directly from the Big Switch campaign, CHOICE has been one of the most vocal opponents of commissions paid to financial planners by financial product manufacturers.
It has opposed commissions on the grounds that such payments skew advice, make it difficult for consumers to know what they’re paying, and increase the cost of advice.
In its submission to the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Financial Products and Services in Australia, CHOICE said that “supply-side competition in any sector is notorious for driving up costs for consumers and has the effect that intermediaries – in this case the financial adviser who, in theory, are supposed to be independent expert financial advisers – behave as agents for fund managers”.
“CHOICE does not believe that conflicts of the magnitude presented by commissions can be addressed through disclosure,” it said.
“Instead, we believe that government, together with industry and consumers, should be working towards a regulatory system that requires the removal of conflicts of interest like these.”
CHOICE’s PJC submission said commission as a remuneration mechanism failed for the following reasons:
• Advisers are incentivised to recommend sale of non-financial assets (like real estate) to invest in financial assets;
• Advisers are incentivised to recommend inappropriate products with big commissions;
• Advisers are incentivised to churn clients through products;
• Adviser biased against liquid/safe assets which pay low or no commissions;
• Advisers are incentivised to recommend gearing;
• It lacks transparency in total remuneration to the adviser; and
• The value of advice relative to the cost of the advice is difficult for the client to determine.
Zinn says the overwhelming objective of the Big Bank Switch campaign is to help consumers recognise that as a collective they have significant buying power.
