NAB says brokers are a ‘force for good’, backs trail

“The digital origination of mortgages is still very immature compared to what you might consider to be a simple product, such as a transaction account, personal loan [or] credit card. That may well change over time and you may see more of that product being originated through digital channels, but the physical channels at the moment — in terms of the ability for a customer to sit down and have a conversation with somebody — is still the predominant way that product is distributed around the world, not just [in] Australia,” Mr Cahill told the PC.

“So, I think brokers play an important role in the marketplace.”

Productivity Commission chairman Peter Harris said that it’s difficult for the advisory body to accept the statement that trailing commissions help “stop churn”.

“Churn is a competitive opportunity potentially for a customer… It’s almost like confessing the conflict,” the chairman said.

Agreeing with Mr Harris, commissioner Stephen King said that the rationale that trail commissions are necessary for ongoing engagement with mortgage customers “doesn’t make a great deal of logical sense” because if the broker advises the customer to switch to a different lender with a more suitable offering, then it’s not stopping churn.

Mr Cahill pointed out that the issue is a lot more complex than that, because if brokers were solely paid an upfront commission, then the question that could be put forth is whether such an arrangement would drive brokers to switch their customers’ home loans as a way to generate revenue from different lenders.

Conversely, if they were just paid trail commissions, the question that could be posed is whether such a structure would incline brokers to continually acquire customers to build their ongoing trail book, without necessarily looking out for their interests over the course of their home loan.

“That’s just the pure economic argument,” Mr Cahill said.

The COO noted that NAB expects brokers who receive trail commissions to have an ongoing relationship with their customers, and that Anthony Waldron, the bank’s executive general manager of broker partnerships, is currently looking at ways to ensure that is taking place.

When questioned about NAB’s ownership of aggregators, Mr Cahill explained that although NAB does own three aggregation businesses, they don’t operate on franchise models. As such, the argument that brokers who process loans through bank-owned aggregators face conflicts of interest does not apply, according to Mr Cahill.

“None of the brokers who aggregate under our three brands are employed by National Australia Bank, so [it’s] quite a different model to, for example, Mortgage Choice or Aussie Home Loans,” the COO said.

Mr Cahill also posed the question of how the industry would go about “[validating] what constitutes the consumers’ best interests”.

“Is it prices or other factors? How would you work that though? I think the idea of requiring brokers to put the customers’ interests first is appropriate, and I think the vast majority of brokers within Australia would absolutely argue that they do put their customers first,” the COO said.

According to Mr Harris, conflicts of interest could have always been addressed by establishing contractual agreements between brokers and clients, but he noted that the commission cannot dictate how brokers should run their business.

The chairman confirmed that the issue of conflict will be addressed in some form.

[Related: Industry to defend trail commissions]