Broker commission reform could mirror insurance industry

The head of a leading aggregation group says ASIC’s impending inquiry into broker commissions could lead down a similar path as the insurance industry.

Speaking to The Adviser, Connective director Mark Haron said he is confident that any review to remuneration structures in mortgage broking would have a similar outcome to the recent review faced by the insurance sector.

“If you look at a mortgage product, it’s very similar to an insurance product. The insurance industry has just gone through a change in their remuneration structures, moving away from mostly an upfront [commission] option to a balanced upfront option with a trail and clawbacks,” he said.

“What they’ve settled on is very similar to how mortgage brokers currently get paid, so I’m pretty confident that any review would push towards something similar.”

The federal government announced on 6 November 2015 that it would begin “phasing down” commissions in the life insurance industry.

From 1 July 2016, upfront commissions will be phased down to a maximum of 80 per cent, dropping to 70 per cent from 1 July 2017 and then to 60 per cent from 1 July 2018, together with a maximum 20 per cent ongoing commission.

The government will also introduce a two-year clawback period to 100 per cent of the commission on the premium for the first year of the policy, decreasing to 60 per cent in the second year of the policy.

Mr Haron said it won’t be as simple as removing an upfront commission and replacing it with a fee-for-service model – “it’s just not that simple a solution”.

“Investment advice is a whole different kettle of fish, and I guess that’ll be a big part of what engagement with industry bodies and the banks will be given to this inquiry. Someone giving you $500,000 to invest and it all getting lost is completely different to arranging a mortgage or arranging an insurance product,” he said.

“I don’t see the advice provided by mortgage brokers to be compared to investment advice – it will be compared more to insurance advice.”

Mr Haron’s comments come after AFG chief executive Brett McKeon wrote to 2,600 brokers warning that the removal of upfront commissions “will have a massively negative impact on the sector if enacted” as a result of ASIC’s inquiry.

“Brokers would in effect derive no income for two years. This is not a sustainable model for employment," he wrote.

“If this were to occur, ultimately new mortgage brokers into the market place would be limited as there would be a significant ramp up before regular income is generated."

Mr McKeon added that the suggested fee-for-service model would have a negative impact on both brokers and consumers.

“Under a fee-for-service model, it is likely that potential customers will seek to avoid this payment by engaging directly with a mortgage vendor at the branch level, where no fee would be applicable,” he said.

“Real choice would be lost, which is not in the interests of the consumer.”

[Related: Former CBA exec sparks commissions debate]

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