The chairman of the Productivity Commission has restated his concern regarding the payment of trail commission, warning that “someone is going to have to deal with this question of commission”.
Despite ASIC’s remuneration review finding that ongoing trail “usually provides an incentive to aggregators and brokers to put forward higher-quality loans where consumers are less likely to default on their obligation”, and despite several industry figures — including FBAA head Peter White, MoneyQuest managing director Michael Russell and National Australia Bank CEO Antony Cahill — giving evidence at the public hearings last month of the benefits and necessity of trail commissions, the PC’s chairman suggested that trail could instead be paid to borrowers.
Speaking at the ASIC Annual Forum on Tuesday (20 March), Peter Harris argued that he had not been convinced that trail commission benefits customers.
He told delegates that while the commission “didn’t make a clear statement saying they’re rotten and evil”, they do believe that trail commissions are “quite odd”.
“[It] is purported to be the case that [trail commissions] are either paid by the banks in order for the broker to look after you during the period of the loan. But when we ask the banks, ‘Are there any performance standards that go with this in return for your money? Have you asked them if they’ve spoken to the customer in the last 12 months?’, the answer generally appears to be ‘no’.
“[There’s] a good chunk of money out there paying for service for which there is no performance standard, which is an interesting development. The other rationalisation is [that] it’s there to stop churn.”
However, Mr Harris stated that there was “conflicting evidence” given surrounding churn.
“In some cases, exactly the same broker representative who told us that churn wasn’t relevant [was] in a public statement, on record, saying it was exactly the reason why [brokers are] getting these payments,” the chairman said.
“Somewhere, someway, someone is going to have to deal with this question of commission.”
Remarkably, Mr Harris suggested that instead of banks paying brokers trail commission, the payment could be made direct to a borrower.
He said: “There are alternatives into the idea of a [trail] commission paid to a broker. The average $665 a year payment could be paid to the consumer not to switch loans,” Mr Harris suggested.
The commissioner noted that the final draft of the Productivity Commission’s report (due in July) is likely to address the impact that trail commission has had on competition.
“Has the revolution been captured by the establishment?”
Mr Harris also suggested that while brokers may have disrupted the mortgage market, he questioned who now held the most market power.
“The question is who’s exhibiting the market power? That is the most important issue,” Commissioner Harris said.
“There are a number of potential suspects starting from, of course, the banks themselves, but equally it is possible that mortgage brokers themselves have substantial market power in this marketplace.
“[What] are [brokers] doing today with that particular power? [I] think a number of people haven’t focused on [that] in exactly the way we would in a competition inquiry. We would say: ‘Gee, that’s interesting, these banks don’t appear to be able to push back on the brokers’.”
Commissioner Harris referred to testimony made by the major banks to the financial services royal commission and suggested that the banks’ ability to “re-determine payment arrangements in the customer’s best interests” has been diminished by the broking industry’s increased market share.
“Even the Commonwealth Bank can’t act on its own, which is an astonishing reflection of apparent market power,” Mr Harris said in reference to the bank’s appearance before the royal commission.
Mr Harris acknowledged the role that the “broker revolution” played in enhancing competition when the industry first emerged, but he questioned whether brokers still work in the best of interest of customers.
“Brokers are potentially wonderfully competitive forces. The question is, has the revolution been captured by the establishment?” the chairman said.
Mr Harris asked: “After 20 years, has this degree of change now being turned around from being a potential benefit to consumers to being potentially acting somewhat against their interest and that is clearly within scope for us — that is a competition issue.”
The Productivity Commission’s draft report was widely criticised by the broking industry, with the associations calling some of its views on broking “limited”, “amateur” and — in some cases — “nonsense”.
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