Updated: Government will look to ban trail commissions in the broking industry for new loans from 1 July 2020 with a “further review” in three years on the implications of removing upfront commissions and moving to a borrower-pays remuneration structure.
Following the release of the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Treasurer Josh Frydenberg said that the government would be implementing all 76 recommendations.
However, the recommendations around broker remuneration have not been adopted in full. While Commissioner Hayne called for a move away from a lender paid commission to a consumer paid fee, the Treasurer has been cognisant of the major ramifications this could have on industry.
He has therefore agreed to ban trail commissions next year but said that government look at the feasibility of moving to a consumer-pays model in three years’ time.
Legislation is before the parliament to ensure financial products are appropriately targeted and to give the Australian Securities and Investments Commission (ASIC) the power to intervene to prevent consumer harm.
Legislation is also before the parliament containing a comprehensive package of reforms designed to protect Australians’ superannuation savings from undue erosion by fees and insurance premiums, and to improve outcomes for members of superannuation funds.
Government has said that this will be “strengthened” to “remove conflicts of interest between brokers and consumers by banning trail commissions and other inappropriate forms of lender-paid commissions on new loans from 1 July 2020 with a further review in three years on the implications of removing upfront commissions and moving to a borrower-pays remuneration structure”.
The government response reads: “The government agrees to address conflicted remuneration for mortgage brokers. The government recognises the importance of competition in the home lending sector and will proceed carefully and in stages, consistent with the recommendation, with reforms to ensure that the changes do not adversely impact consumers’ access to lenders and competition in the home lending market.
“From 1 July 2020, the government will prohibit for new loans the payment of trail commissions from lenders to mortgage brokers and aggregators. From that date, the government will also require that the value of upfront commissions be linked to the amount drawn-down by borrowers and not the loan amount, and ban campaign and volume-based commissions and payments.
“The government will additionally limit to two years the period over which commissions can be clawed back from aggregators and brokers and prohibit the cost of clawbacks being passed on to consumers," Treasurer Josh Frydenberg said.
However, the government acknowledges tinkering with broker remuneration could have a detrimental impact on competition.
"We don’t want the work that is now currently with 25,000 small businesses and people working within the mortgage broking industry to just simply go with the big banks. We don’t want to give the banks a free kick. And that’s why previous findings of the Productivity Commission and of other reports... has found this shouldn’t be changed," said Mr Frydenberg on Tuesday morning.
He added: “In outlining the government’s response to the royal commission, I want to make clear that our principal focus is on restoring trust in our financial system and delivering better consumer outcomes while also maintaining the flow of credit and continuing to promote competition.
“These objectives are vital to the health of our economy and are therefore vital to the health of the community.”
The government will also ask the Council of Financial Regulators, along with the Australian Competition and Consumer Commission (ACCC), to review in three years’ time the impact of these changes and implications for consumer outcomes and competition of moving to a borrower-pays remuneration structure for mortgage broking, as recommended by the royal commission, and any associated changes that should be made to non-broker facilitated loans.
“This also responds to recommendations of the Productivity Commission’s report Competition in the Australian Financial System dealing with the remuneration of mortgage brokers” he said.
The move to a consumer paid model could be devastating to industry if nothing else changes.
In the recent Consumer Access to Mortgages Report from Momentum Intelligence, it was found that while the vast majority of borrowers are satisfied with their mortgage experience when using a broker, most would be unwilling – or unable – to pay a fee for their service.
Nearly two-thirds (58 per cent) said they would not be willing to pay a broker a fee.
While two-fifths of respondents said they were willing to pay a fee, the vast majority were only willing to pay a nominal fee. Just 11 per cent said they were willing to pay a maximum of $1,000 for a broker’s service, while 3.5 per cent would pay up to $2,000 and only 1 per cent would pay up to $5,000.
A common theme uncovered from the responses was that while borrowers prefer to use a mortgage broker, they would be unable to afford to pay a fee-for-service if it were mandated.
Given the findings of Momentum Intelligence’s Consumer Access to Mortgages Report, a fee-for-service model would therefore restrict the ability of borrowers to access mortgage brokers, restrict the access to lenders without a branch presence, reduce competition in the mortgage marketplace and potentially hand back power to the major banks.
Find out more about what the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry means for the broking industry, and what the next steps are, by attending the Better Business Summit 2019.
Running across five different states every Thursday from 14 February, the Better Business Summit provides brokers with straight-talking, practical advice to help them grow and improve their businesses in this time of change.
Tickets are selling out – so make sure you secure your ticket today to stay ahead of the curve and prepare your business.
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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