The Commonwealth Bank has admitted the commissions it pays to mortgage brokers can incentivise them to sell risky mortgages to CBA customers, but it does not want to stop the practice until other banks stop it too.

The head of the banking royal commission, Kenneth Hayne, has also suggested CBA has been “economical with the truth” with its customers by neglecting to tell them the value of the commissions it pays mortgage brokers who sell them CBA products.

Daniel Huggins, CBA’s executive general manager of home buying, gave testimony on Thursday morning. It was the first time a representative of Commonwealth Bank appeared at the banking royal commission.

Senior counsel assisting, Rowena Orr QC, asked Huggins about a confidential letter written by former CBA chief executive Ian Narev, in which Narev admitted CBA knew it was incentivising its mortgage brokers with volume-based and trailing commissions to sell risky mortgages to customers.



In the letter dated 10 February 2017, which Narev wrote to Stephen Sedgwick, the then head of the retail banking remuneration review, Narev said “the use of loan size linked with upfront and trailing commissions for third parties can potentially lead to poor customer outcomes”.

Orr then read from CBA’s submission, which was attached to Narev’s letter to Sedgwick in February 2017, which revealed in detail that CBA knew mortgage brokers were selling mortgages to customers that were riskier, more expensive and more likely to burden customers with debt.

Orr then read a passage from the submission that showed CBA had argued to Sedgwick last year that commissions should be reduced uniformly across the industry, in both proprietary and broker channels, to “eliminate bias and avoid significant market disruption”.

CBA did not want to be the “first mover” to reduce its commission payments, Orr suggested.

Huggins replied: “Yes. There’s two problems. One, there’s a first mover problem, in that the person who moved first would likely lose a lot of volume. The second problem is you create a conflict if one person, or half of the people move, and the other half don’t.”

Hayne interrupted to say: “I thought that was called a market and competition?”

Huggins was taken aback but replied: “Yeah. Well it’s certainly competition. That’s right.”

CBA’s submission admitted that if mortgage brokers were paid a flat fee, rather than volume-based commissions, then they would be able to be “agnostic” about loan size and leverage. CBA continues to pay volume-based commissions to brokers, the commission heard.

Huggins said any changes to those arrangements would need to be “on a uniform basis, otherwise what is a very important business to the Commonwealth Bank could be substantially damaged”.

He said CBA’s research showed 20% of its customer base would only consider getting a mortgage through the broker channel.

Orr later asked why CBA did not tell its customers how much commission it paid mortgage brokers who sold them CBA products under its Connect referral program.

Huggins responded: “They could be included, I’d need to understand the systems changes and that, but you know, I’m not, they could be, I’m not, you know, they could be included.”

Hayne then asked: “Well, why aren’t they?”

Huggins said: “They haven’t been included because the, it was taken on the basis of, we can’t provide the customer with an accurate dollar amount of that commission and, as you suggest, improvements can be made to that, in terms of disclosure.”

Hayne said: “Would it be unfair to describe the proposition as being economical with the truth?”

Huggins replied: “It was not our intention in setting it up this way. We were, you know, our belief was we couldn’t accurately calculate the dollar amount,. But I certainly acknowledge that there are other ways to provide more transparency to the customers about what’s being paid. We haven’t done that to date, [but] it’s certainly something I’ll take away.”