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One of the most experienced and respected mortgage professionals in the country has shared his fears over the future of trail commissions as ASIC prepares its report into broker remuneration.
Speaking at an FBAA event in Sydney yesterday, industry veteran Steve Weston shared his views on ASIC’s commission review and gave brokers an insight into how markets such as the UK operate with lower commission levels. He also shared his views on the risk to good customer outcomes by not remunerating brokers appropriately.
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Following senior roles at St George Bank, Challenger and NAB, Mr Weston spent several years in the UK as CEO of mortgages for Barclays. During this time there, he gained first-hand experience of how regulatory changes affected Britain’s broker market.
He suspects that trail commissions may be one of the focus areas for regulators and the government as the December deadline for ASIC’s remuneration review approaches.
“The things we are hearing about are vertical integration and white-label lending. As long as the aggregator ownership is disclosed to customers and brokers aren’t being paid a higher commission on white-label products, that should be okay,” Mr Weston said.
“The most challenging area for me will be around the broking industry being able to clearly demonstrate what work they do to justify payment of a trail commission,” he said.
“It is paid almost nowhere else in the world. If we go back and talk to our financial planning brothers and sisters in Australia, many never expected that they would lose trail in the way that they have.”
Mr Weston said the FBAA has a key role to play in educating the government about the value of trail commissions. During his time in the UK, the former Barclays banker said he spoke “endlessly” about the benefit of trail to regulators, aggregators and lenders.
“The benefit of trail for brokers is that you will invest more in your business and in your customers. If you are not [receiving trail commission], it is just transactional,” he said.
“For aggregators, it is important because by getting a clip of that trail ticket they are able to invest in compliance and technology, which at the end of the day assist brokers to provide good customer outcomes."
“But we need to be very clear that brokers provide post-settlement service to customers to justify trail. We also need to look at markets where trail does not exist and show some of the poorer customer outcomes as a result of that.”
Mr Weston explained that 90 to 95 per cent of home lending in the UK is fixed rate, with the most popular product being the two-year fixed rate mortgage.
“Because brokers aren’t getting paid enough commission to make a reasonable living, some customers are being recommended two-year fixed rate loans and the brokers churn them after two years to get another upfront. In some cases, a longer fixed rate term may have been more appropriate for the customer and this may have occurred if trail was paid. That is one of the unintended consequences of not having trail.”
The FBAA’s Peter White said the industry must ensure it communicates to the government the importance of trail commission.
“Trail is paid predominantly to manage clients post-settlement. From a lender point of view, it is to create longevity in that client and to minimise churn,” Mr White said.
“There is a lot of extra work that happens after the event that enforces why trail is of value. But we are the last man standing. There are not many in the world that do it. So there is [a] point of concern around trail commissions.”
[Related: ASIC to summon brokers over commissions]
