The Finance Brokers Association of Australia (FBAA) has reaffirmed the benefits of trail commission, hitting out at calls from a consumer group to scrutinise the broker remuneration.
Consumer group CHOICE recently revealed that, in its submission to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, it had included a call for the commission to use its “special powers” to compel banks, insurers and lenders to provide evidence behind broker commissions.
Amid other requests, the consumer group is asking the commission to “disclose what service mortgage customers are receiving when mortgage brokers are paid commissions for potentially the whole life of the loan”.
CEO Alan Kirkland said: “Mortgage brokers can receive trail commission payments on loans they arrange until the consumer switches products. What service do consumers receive for this ongoing payment?”
The consumer group has historically been very critical of broker remuneration, despite the financial services regulator recently finding that the commission structure was generally sound and only needed “fine tuning”.
However, the Productivity Commission’s recently released draft report into competition in the Australian financial system references CHOICE in several places, and likewise calls for “feedback on the rationale for how mortgage broker commissions are structured”.
The commission said that it is “considering making a recommendation to the Australian government on the matter of trail commissions and commission clawbacks”.
Reiterating comments from last week, FBAA executive chairman Peter White released a statement on Friday (16 February) hitting out at CHOICE’s attempt to influence another ongoing commission — the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry — to deal with issues that he believed had already been dealt with in the past.
“The FBAA has commented on this and proposed discussions with the commission, and this repeated supposed issue simply isn’t an issue,” Mr White said.
“It is widely known and repeatedly commented on in the media, and to regulators and government, that trail commission is paid for multiple reasons that all support good consumer outcomes.”
Mr White emphasised that it is partly to minimise “inappropriate churn” of loan portfolios that may not be in the borrowers’ best interests, but also for the broker to service any queries from the borrower.
“Brokers already review all the loans within their portfolio annually to ensure their loans have not become unsuitable for the borrower due to any changes in their personal circumstances,” the executive chairman said.
“It’s an ongoing job that lenders would not usually do.”
The head of the FBAA added that he felt the call from CHOICE was “somewhat hypocritical”, given that they had previously run a campaign (One Big Switch) which urged borrowers to change mortgage provider and reportedly earned CHOICE a commission.
“Strange how it was and is good for them, but not for the greater broker space,” Mr White concluded.
Likewise, an ex-banker turned broker recently told The Adviser that he believed the removal of trail commission would only serve banking interests.
Speaking to The Adviser on the Elite Broker podcast, mortgage broker at PFS Financial Services Daniel O’Brien claimed that banks would not pass on savings to clients if they no longer needed to pay trail commission.
“The reality is, if you take trail commissions away, all that’s going to happen is banks will make more money. They’re not going to pass it on to their clients,” Mr O’Brien said.
He continued: “The benefits of [paying commission to brokers] is [that banks] don’t pay us a wage. They don’t have all the other ancillary costs that [are] associated with a business of that size and magnitude.
“Having run a branch, I can tell you, it’s so much more profitable to use a broker compared to a branch lender.”
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