Let’s be clear on one thing. Most bank mortgage specialists are good people who do the right thing.
Then, there are the other kind.
Consumer watchog, the Financial Consumer Agency of Canada, is targeting those reps with a cautionary critique of mortgage sales practices at the big banks.
The agency is worried that banks may be placing “sales ahead of their customers’ interests.” That risk is heightened, it says, by the fact that, “Banks generally impose fewer controls and exercise less-intensive oversight on the sales practices of mobile mortgage specialists (MMS), compared with other bank sales roles.”
The mortgage sections of FCAC’s report read like a recipe book for mortgage specialist wrongdoing. It’s bound to result in policy changes, given that specialists account for up to 90% of some banks’ mortgage volumes.
Here’s a sampling of the FCAC’s findings from its nine-month long study (italics and bold headings ours):
- Sell or Fail: “Each of the six large banks uses a 100 per cent variable pay model to compensate their MMS. This means MMS are paid straight commission and do not earn a base salary….Most banks also set individual volume and cross-selling targets for their MMS and pay higher commission rates for sales that exceed targets. For example, banks may raise the commission rate by 10 basis points when MMS reach 105 per cent of their quarterly volume target of $10 million.”
- Pay Can Sway: “Variable pay compensation models may discourage MMS from making reasonable efforts to assess and take into account a consumer’s needs and financial goals. The main risk to consumers in this compensation model is mis-selling. For example, the compensation model may encourage specialists to recommend mortgage products that earn higher commissions even if they are not the best option for the consumer…In addition to mortgage volume, compensation rates for MMS may be influenced by several factors, including: mortgage types, term lengths, interest rates, cross-selling of other products as part of the mortgage sale. (Not all specialists get paid more by term but most get paid more for selling you a higher rate.)
- Would You Like to Supersize That Mortgage: “The opportunity to earn higher commissions for reaching mortgage volume targets may also lead specialists to recommend larger mortgages to consumers. Furthermore, MMS may encourage consumers to acquire a mortgage sooner than they were intending, rather than encouraging them to save for a larger down payment.”
- Get Ready for the Insurance Pitch: “Specialists can…earn higher commissions by meeting cross-selling targets. In most cases, banks expect MMS to sell creditor insurance products such as life, critical illness or disability insurance to as many as one in three mortgage borrowers…Employees can mistakenly or deliberately imply that creditor insurance is sold as part of the credit product or that credit approval is contingent on the purchase of creditor insurance.” National Bank Financial noted yesterday that, “We believe [creditor insurance] is one of the highest return-on-equity products sold by the banks.” (The worst part is that big bank creditor life insurance can’t be ported to a new lender, preventing some borrowers from getting cost-effective insurance when they switch lenders.)
- Regulation Schmegulation: “Controls to mitigate the risks associated with sales practices are underdeveloped…Performance management programs—including financial and non-financial incentives, sales targets and scorecards—may increase the risk of mis-selling and breaching market conduct obligations.” (That’s partly because the FCAC is weak on consumer protection, a problem it suggests it will address. “Unlike mortgages processed by a bank’s internal staff, mortgage brokers are directly accountable to an external, independent regulator,” notes the CMBA.)
- Stars are Hard to Rein In: “The competitive market for the services of high-performing MMS can make it more difficult for banks to enforce codes of conduct and take disciplinary action. During the review, FCAC learned there have been cases of MMS leaving their employer before the bank could complete its investigation or take disciplinary action.”
What this means to you
Again, we stress that much of the funny business cited above by the FCAC applies to only a minority of mortgage specialists. FCAC says it “did not find widespread mis-selling during its review” of banks.
That said, be wary of bankers pushing things like creditor life insurance, longer mortgage terms, credit lines or anything else that you didn’t ask them for. Naturally, bankers must make recommendations and most of their recommendations are legit. But if you sense them applying pressure, you may want to question their motives and disengage.
Of course, this goes for brokers too. None of this should imply that they are all innocent by comparison. While most are honourable, brokers, too, are swayed by compensation, lender incentives and so on.
Your best defence when it comes to any kind of salesperson bias is simple: do your own research. That’s probably why you’re here, so you’re on the right track.
You, and only you, are your best advocate. Everyone else mainly wants to get paid.