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Removal of trail would reduce competition, warns AFG

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Reporter 2 minute read

Abolishing trailing commissions for mortgage brokers would reduce competition, drive up home loan rates and make banks the “unintended beneficiaries”, the Australian Finance Group has warned.

Speaking after the release of the Productivity Commission’s final report on competition in the Australian financial system, which recommended that the government remove trail commissions, the aggregator warned that such a move could be counterproductive and potentially lead to reduced competition in the financial system.

AFG CEO David Bailey cautioned that any move to ban trailing commissions for mortgage brokers would have the impact of consolidating the lending base of the banks, stating: “This is ironic given the tone of the majority of the final report. Consumers have been voting with their feet in greater numbers for over 20 years and increasingly use brokers for better service and less costly, better-suited home loans.

“Mortgage brokers are encouraged through trailing commission to stay with customers for the life of their loan, to review products and add value. It is in the business interest of brokers to work for their clients through the years to help them continue to gain better finance outcomes as circumstances change.

“Banning the incentive to work with customers for longer durations would have a detrimental impact on the very services that brokers help provide — greater competition.”

Mr Bailey echoed the thoughts of several other heads of industry by highlighting that ASIC’s review of broker remuneration ultimately found no reason to remove trail commissions, adding: “The current structure is not broken. The removal of trail will simply hand more power to the major banks and non-major lenders and consumers will pay the price.

“Since the ASIC broker remuneration review, our industry has come together to address the recommendations from the data-driven ASIC report.

“Excellent progress has been made and a good consumer outcome has been defined. All members of the Combined Industry Forum are actively engaged in addressing the proposals raised by the regulator.

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“In light of this progress, momentum-based decisions which ignore the full ramifications of such a move need to be carefully considered.”

The head of AFG went on to say that brokers are filling vital roles in areas that the banks had vacated, and particularly help vulnerable customers, first home buyers and those with complex borrowing needs.

“Providing assistance in these areas takes a lot of time — time that the bigger lenders are often not prepared to give.”

Mr Bailey highlighted that AFG had provided the Productivity Commission with evidence of the savings brokers make for their customers through ongoing contact over the life of a loan, stating that it was “disappointing” the commission “did not give sufficient weight to this evidence”.

“We invite them again to spend time with some AFG brokers to understand the value a demonstrated level of contact with a customer can deliver,” Mr Bailey said.

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He concluded: “The last thing Australian consumers deserve is higher prices for lending products and less competition where banks can drive up costs for existing customers.

“We can’t afford to jettison 20 years of competitive experience without giving regard to the findings of other reviews and ensuring a stable, dynamic, customer-focused lending environment remains.”

[Related: Industry reeling from PC trail stance but calls for calm]

Removal of trail would reduce competition, warns AFG
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