Removing trail would turn brokers into ‘hunters, not farmers’

In his interim report, Commissioner Kenneth Hayne suggested that broker remuneration arrangements “might” be conflicted, stating that lenders paying value-based commissions to brokers may be breaching their obligations under the National Consumer Credit Protection Act (NCCP).

However, Mr White noted the potential impact of alternative remuneration models, including a move to a fixed fee, and the removal of trail commissions.

Mr White suggested that should a fixed upfront remuneration be introduced, banks may be monetarily disincentivised to lend to borrowers requesting smaller loan sizes, with the gap between interest returns and upfront commission paid tighter for smaller loans.

The group head also said that the broker-client relationship may become more transaction-based if trail commission is removed.  

“If there’s no trail, you’re turning brokers into hunters, not farmers — it becomes a transaction,” the MD said.

“I think [if only] upfront commission [was paid], brokers could think, ‘If I don’t get this client to borrow more money or change banks, I don’t eat’. I think there’s a lot more conflict around that.

“We’re [Loan Market] looking at all these different models, and all of them have challenges.”

Mr White also questioned the suggestion made by Commissioner Hayne that higher average loan sizes and interest-only loans through the broker channel reflected greater credit quality risks.

“We’re finding it hard to see where the systemic issues are, that are sometimes referred to,” Mr White added.

“We’re not seeing any major complaints through the [Credit and Investment Ombudsman] — obviously, there are complaints and they need to be addressed, but they’re not systemic complaints.”

He continued: “Arrears are similar, so where is the systemic problem that the commissioner identified?

“The commissioner refers to higher loan sizes, but higher loan sizes often come about because brokers sit down with a client and say, ‘Here’s the maximum amount you can borrow from these lenders’. If a client asks, ‘How much can I borrow?’, the broker will sit down with them and show them that list.”

Mr White added: “When interest-only and principal and interest are priced the same, then it can be a very legitimate strategy for a customer to reduce their payments and preserve flexibility, or they might want to have part interest-only, part principal and interest.

“There was no discussion [from the commission] about how many of those interest-only loans were also combined with a split loan with a principal and interest facility.”

Mr White said that the Australian Securities and Investments Commission (ASIC) may need to undertake another review on the broking industry, this time to assess the outcomes of reforms introduced by the Combined Industry Forum, and to ensure that clearer data is collected to help the industry “debate the issues properly”.  

The public is invited to respond to Commissioner Hayne’s interim report from the financial services royal commission, which covers the first four rounds of hearings.

Submissions in response to the interim report can be made on the royal commission website and must be received no later than 5pm on 26 October 2018.

[Related: Commissions ‘might’ breach NCCP: RC]