The executive chairman of Loan Market has said that he believes the government will seek to retain trail commissions for brokers but suggests that brokers look to diversify now regardless.
Speaking at the Loan Market Connect conference 2018, held in the Gold Coast this week, the executive chairman of Loan Market, Sam White, outlined his thoughts on the Productivity Commission’s (PC) recommendation to government that trail commission be removed.
Mr White said that, of all the commissions and inquiries that have looked at this sector recently, the PC report was “always the one that people were most nervous about”, and that it was “always going to be the most challenging report”, given the attitudes and conclusions of the PC’s draft report.
While the brokerage head said that he “fundamentally disagreed” with the trail removal recommendation, he added that the move was a “major step forward from where we could have been”.
Mr White elaborated: “The biggest concern was that they were going to recommend a fee for service; to do away with commissions all together and have the client pay a fee. The fact the Productivity Commission came out and said, no, it will be commission, it shouldn’t be trail - and if there is no trail, there should be an increased upfront - I think, is a major step forward from where we could have been.”
However, the Loan Market head said he did not believe that trail would be removed by the government.
He told delegates: “My personal view is that I think we're going to keep having trail and the reason that I say that is once that you accept that there should be a commission paid by the lender to a broker, the best way for that to happen is through trail, because if we were to move to purely upfront commissions, we’d move to be purely transaction. There would be a lot of pressure for people to be transactionally focused, and I think that is bad for the customer. I think it is better for us to have a spread of payments that enable us to look after a customer. There is a better alignment in long-term interests for a broker and a customer with trail.”
Mr White echoed the concern that “another big danger” of removing trail is that it would make it harder for smaller lenders to compete, “because they will need more capital to pay the upfront, so there will be more cost of capital that goes into those loans that means that customer pay a higher interest rate”.
According to Mr White, instead of removing trail, the government should recommend that there be a “codification of the expectation that brokers keep in contact with their clients” as part of the trail commission framework, which he added good brokers already do.
In conclusion, Mr White acknowledged that his predictions “could be wrong”, and, therefore, told delegates that his “biggest message is: don’t waste time. Don’t hold back and consider whether you should or shouldn’t do something, go and help customers now".
Noting that Loan Market brokers in New Zealand had continued to be prosperous despite the removal of trail there, Mr White said: “Our brokers in New Zealand run good businesses. They’ve had to adjust, they’ve had to change, and we know how to make that work, for example with [no advice] insurance…
“So, to keep investing in your business [without trail], you're going to have to go broader. If the royal commission and all these inquiries tell us anything, it is that we can no longer be beholden to others, or assume that things will stay the same. We need to take the future in our own hands and ask better questions of our customers. If they are taking out debt, they need to be protected. You cannot leave money on the table.”
Mr White concluded: “So, losing trail is not going to be the end of the broker… The brokers that run good businesses and have good trust with their clients will continue to do that. The reason why we should keep trail is because it will help with better customer outcomes.
“There will be a lot of debate on it, but I think the key thing to do is not waste your energy on what may or may not happen. Get on and start to do it more effectively now.”
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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