B.C.’s financial services regulator is proposing that mortgage brokers in the province disclose their commissions, a move the agency says is necessary to protect consumers but that brokers across the country argue will undermine confidence in their industry.
The province’s Financial Institutions Commission issued an open letter on its website last month detailing a plan that would require mortgage brokers to tell clients how much money they stand to make on a deal.
Mortgage brokers are provincially regulated, meaning the proposal would only apply to those in B.C. But the industry is closely watching the issue given the likelihood that other provincial regulators will follow suit.
The Financial Services Commission of Ontario said in an e-mailed statement that it was aware of the discussion in B.C. and “takes an interest in developments of the mortgage-broker industry across Canada, especially when those developments involve consumer protection.”
Unlike independent financial advisers or real estate agents, mortgage brokers don’t typically charge their clients fees, instead collecting a commission from banks and mortgage lenders. While brokers aren’t usually tied to a specific financial institution, in practice many work with only a handful of lenders who reward their loyalty with bonuses based on the volume of business they generate.
Under the current rules, brokers must disclose to clients that they are being paid by a lender, but aren’t required to reveal exactly how much they make on a deal.
The regulator says it’s concerned that brokers might be tempted to steer clients toward lenders who pay the highest commissions and bonuses, rather than into the most suitable mortgage or the one with the lowest interest rate.
“Our concern is firstly that there is a lack of transparency in the way that brokers are compensated and that consumers don’t have any information about the potentially powerful influences on a broker’s advice to them,” the commission’s deputy superintendent Chris Carter said.
Brokers argue that disclosing commissions would only confuse their customers, making them think they’re being charged extra or paying higher mortgage rates than they would at a bank. They fear that being forced to show how much they get paid will drive consumers toward the major banks, where mortgage salespeople also often work on commission, but aren’t required to disclose their compensation to customers.
“It could end up hurting the brokerage industry because of the perception that you’re paying more when you’re dealing with a broker,” Kelowna mortgage broker Laurie Baird said. “It puts us at an unfair disadvantage against the reps from the banks.”
Commissions are fairly standard across the industry, ranging from roughly 80 to 110 basis points on a typical mortgage (there are 100 basis points in a percentage point.) That equates to $4,000 to $5,500 on a $500,000 mortgage.
But brokers say disclosing an accurate dollar figure for every client will be difficult as many don’t know exactly what their commissions will be at the time, since they might end up qualifying for a volume bonus later in the year once they’ve done enough deals with a lender.
“It’s really complicated because how are you going to be able to disclose the exact amount if six months from now maybe your volume went up and you’re going to get a little bit of a bonus?” asked Donna Telep, a mortgage adviser in Maple Ridge, B.C., east of Vancouver. “As long as the individual client isn’t paying the fee, then I don’t see the purpose.”
At least two trade groups representing brokers have sent written concerns to the Financial Institutions Commission. Brokers are also being encouraged to write their MLAs over the issue.
The issue hits at the core of a larger battle facing the fiercely competitive mortgage broker industry, in which some mortgage brokers sacrifice a portion of their commissions in order to offer the lowest possible interest rates, a practice known as “buying down” the rate.
Such brokers typically make up for the lower commissions through doing a higher volume of deals, sometimes into the hundreds of millions of dollars.
They have drawn the ire of many traditional brokers who argue that revealing their commissions will push clients toward discount brokers offering the lowest fees and rates, but whose mortgages may also come with costly restrictions, such as prepayment penalties for those who need to break a mortgage early.
“They are the Wal-Mart of the mortgage industry,” said Walid Hammami, a mortgage broker in Montreal. “They are racing to the bottom.”
Many brokers are mainly afraid of consumers finding out how much they get paid, says Ron Butler, who operates a large online discount brokerage and is one of the few who supports the idea of disclosing commissions to clients.
“It’s really simple. I operate on one-third the income of the average mortgage broker, so I don’t mind it being showed to people,” he said. “I think it will have next to no effect [on the industry], which gives you some good insight into the level of terror that many mortgage brokers feel about revealing their income to their clients.”