Several heads of industry have voiced shock and disappointment at the Productivity Commission’s recommendations on removing trail, but have emphasised that the government has not yet committed to taking up these reforms.
While the industry sifts through the 686 pages of the Productivity Commission’s final report on competition in the Australian financial system, the initial responses from the report’s recommendation that trail commissions should be “abolished” and clawbacks that are passed on to borrowers “banned” have been of dismay, concern and disappointment.
Speaking to The Adviser, the executive director of the Finance Brokers Association of Australia (FBAA), Peter White, said that while there was plenty in the document to “jump up and down and scream about”, and that the Productivity Commission (PC) had “certainly not listened to what they’ve been told by [the] industry”, he urged brokers and the industry to take the time to read the report and for all to fully comprehend what its impacts would be.
The head of the FBAA voiced dismay that despite there being “so much conversation and so much information being sent to the commission”, they had come up with some conclusions (particularly on trail) that showed “at best, that they can’t have understood how this market works, or at worst, that they don’t care”.
Mr White told The Adviser: “Everyone has to stop and remember that these are recommendations, these are not cast in stone and this is not necessarily what [the] government is going to do. These are recommendations, they are not done deals.
“So, before people get too far on this — we all have to stop, take a breath and then digest it all and respond appropriately to the measures that are inaccurate… and there are plenty of inaccuracies in this, as far as I’m concerned.”
The head of the FBAA continued: “There is going to be plenty of kicking and screaming going on from us, but it has to be focused, relevant and considered. Let’s not overreact.
“We’ll react strongly. We’ll react hard. But it all has to be done the right way; otherwise, all you do is create a whole lot of noise which no one will listen to.
“We need to play it right and be sensible. We need to take a break and gather our composure and understand what needs to be done. We will all be responding, as an industry, to this.”
Likewise, the Mortgage & Finance Association of Australia (MFAA) “strongly disagrees” with the PC’s finding that trail is creating poor outcomes, or that it should be abolished, with the association adding that it “do[es] not believe there is any rationale for removing it”.
“The MFAA believes that trail is contingent income that is only paid if the loan is not in arrears, remains appropriate and did not involve fraud,” the association said in a statement.
“Trail is an important control mechanism. It discourages excessive churn, incentivises quality, aligns the interests of all stakeholders in the value chain with those of the customer, and also allows the broker to continue to provide service over the life of the loan.
“If trail were to be abolished, upfront commissions would need to increase substantially so brokers’ net earnings are not impacted over the life of the loan.”
The association continued: “Brokers earn an average of $86,400 before tax, making their businesses vulnerable to any reduction in income. Any reduction in broker income would decrease choice, competition and the outstanding service brokers provide, which would be a poor outcome for all consumers, particularly in regional and rural Australia.”
However, the MFAA acknowledged that the PC recognised that brokers play a crucial role in the economy and that businesses need to remain commercial, adding that it “strongly agrees” with the suggestion that moving to a “consumer pays” model would “come at a high cost to competition, and that consumers would desert brokers and smaller lenders, meaning that regional communities with no branches would suffer”.
Some findings “fundamentally wrong”
Similarly, the director of major aggregator Connective, Mark Haron, told The Adviser that while he believed the “trail piece is a significant issue that needs to be dealt with”, there were “some positives” to be taken from the report — particularly that the commission had moved away from its consideration of a “consumer pays fee for service” model.
Mr Haron told The Adviser: “The fact that the commission has realised the importance of commissions in general, and that a ‘customer pays fee for service’ is not suitable and is not going to help competition whatsoever, is something that I think we should certainly take some comfort in.”
However, the Connective director said that one of the things that was “fundamentally wrong” about the report was the assumption that the customer “is actually paying for this trail commission in some way, shape or form”.
“Customers are not paying for this, and there is strong evidence [through the MFAA’s Mortgage Broking Through a Different Lens pack] to show that broker activity leads to reduced interest rates to consumers,” the director said.
Mr Haron added that the recommendation was “concerning” and that he wanted to understand the reasoning behind it, given that the trail recommendation was “completely at odds with Treasury’s report to the royal commission recently”.
However, Mr Haron added: “If the regulators are serious about enhancing competition and redirecting power away from the big banks, they will not meddle in broker remuneration structures outside of the reforms set out by the Combined Industry Forum (CIF)...
“Significantly altering the way in which brokers are remunerated could have serious inadvertent consequences. If brokers can’t operate viable businesses, they will leave the industry and this will actually put more power back in the hands of the big banks.”
Removal of trail would “decimate” industry
Likewise, the head of trail book buyer Trail Homes, Nick Young, told The Adviser about his “deep disappointment” with the PC’s recommendation to abolish trail, adding that such a move would “decimate” the broking industry if enacted.
Mr Young told The Adviser: “Getting rid of trail, simplistically, would be absolutely devastating to the mortgage broking industry. Effectively, trail is half of a broker’s remuneration, on average, so if you take half the income away from any industry, you will decimate it.”
Mr Young said that the removal of trail, which has been a constant of the industry for the past 20 years, “absolutely shatters the value of a broker business and makes it very difficult to budget cash flow”.
He added that should the banks have to increase upfront commissions to make up for the lost trail, this would result in a “substantial increase” on the upfront cost of bringing on a mortgage.
“It’s not about just saying we’d remove trail and pay it all as an upfront, it’s not as easy as that. Somebody is going to pay for that — and is going to be the consumer.
“So, by going down this path, not only would it reduce choice for borrowers, it would also increase the cost.”
The Trail Homes head said that such a move would also push borrowers into the big four banks, as a “decimated” broking industry would mean that borrowers would have to go to a lender that has a branch network “and the only people who have extensive branch networks are the four major banks”.
“If borrowers can’t go to a mortgage broker, they would go to someone who has a branch network [i.e. a major bank] and to suggest that this would be a good consumer outcome... I just shake my head in disbelief.”
Mr Young echoed Mr Haron’s thoughts that the PC report recommendation on trail was “very much in contrast” to ASIC’s remuneration review and, more recently, the Treasury report that has been handed to the financial services royal commission.
He concluded: “The key for the industry is to again explain our proposition, just as we have done successfully with ASIC and with Treasury, but also to explain our proposition to the consumer so that they properly understand that if this is adopted, they will be worse off.”
Annie Kane is the editor of The Adviser magazine, Australia’s leading magazine for mortgage brokers. As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also the host of the Elite Broker podcast and regulator contributor to the Mortgage Business Uncut podcast.
Before joining The Adviser team at Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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