The Labor Party has officially announced its policy response to the broker remuneration recommendations from the royal commission, backing away from a consumer-pays model and calling for a lender-paid standardised flat fee.
The federal opposition had previously expressed “in principle” support for all 76 of Commissioner Hayne’s recommendations, which would include a ban on a lender-paid commission-based remuneration to brokers.
However, following widespread campaigning and lobbying by industry on the risks that Commissioner Hayne’s consumer-pays-fee recommendation poses to the viability of the broker channel, to competition and to good consumer outcomes, the Labor Party has softened its position.
Instead of recommending that the consumer would pay mortgage brokers a fee, the Labor Party has proposed that lenders instead pay brokers a standardised upfront commission as a proportion of the loan amount. It has suggested that commissions should be capped at this fixed percentage.
Its response reads: “We have listened to experts including the Productivity Commission and the Governor of the Reserve Bank of Australia, and we recognise that moving to a customer-pays model in mortgage broking poses real risks to competition in the banking sector.”
Labor will therefore:
• Introduce a best interests duty for brokers “as a matter of priority”. This obligation will be a civil penalty provision. Labor will also consult with stakeholders to establish a clear timeline to further align regulation of mortgage brokers with regulation of financial advisers providing financial product advice to retail clients, according to its response. “The reforms introduced to implement these recommendations will enhance, and not derogate from, brokers’ existing obligations to their clients under the National Consumer Credit Protection Act,” it added.
• Ban trail commissions for brokers for new loans from 1 July 2020.
• Ban payment of any other incentives to brokers by lenders.
• Cap commissions at a fixed rate of 1.1 per cent so that banks can’t offer brokers incentives to choose their products.
• Regulate that a commission can only apply to the amount drawn down by the borrower, not the total loan amount.
• Limiting to two years the period over which commissions can be clawed back from aggregators and brokers, and prohibit clawbacks from being passed on to consumers.
Shadow treasurer Chris Bowen commented: “Labor will also abolish trail commissions from lenders to mortgage brokers and aggregators on new loans from 1 July 2020 as well as banning volume-based commissions and ‘soft dollar’ payments being offered to brokers by lenders.
“Labor will deal with the royal commission’s key concerns with mortgage broker remuneration, namely conflicted remuneration and incentives that drive higher average loans sizes that may not be in the consumer’s best interests.
“We will impose a fixed percentage upfront fee for brokers that will eliminate the conflict of interest that comes from different lenders offering different commission rates while ensuring this upfront commission can only apply to the amount drawn down by the borrower, not the total loan amount.”
The opposition has also said that the Council of Financial Regulators, along with the Australian Competition and Consumer Commission (ACCC), will “review in three years’ time the impact of the above 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.”
Several members of industry have welcomed Labor’s change in stance, with Connective director Mark Haron saying: “We welcome Labor’s considered position in respect to mortgage broker remuneration. Preserving a lender-pays commission to broker, not a borrower-pays fee supports competition and choice to all mortgage customers.
“However, we would like to recognise that it was the Coalition government’s position, as stated at the time of the release of the banking RC report, that supported a lender-paid commission instead of the RC recommended customer-paid fee.
“That being said, both parties’ positions neither dismiss or just ignore mortgage broker trail commissions payments, which are more aligned with customer best interests than upfront commissions.”
Mr Haron continued: “Labor takes a significant step forward to suggest a standardised upfront commission fee of 1.1 per cent will apply to future mortgage broker remuneration.
“Connective and the mortgage broker industry look forward to consultation with government and the Treasury to ensure that any remuneration structure proposed is fit for propose, ensures customer best interests are delivered and the sustainability and competitiveness of the mortgage broker industry is maintained.”
Likewise, Sam White, the executive chairman of Loan Market said that “common sense” had prevailed, with Labor putting an end to “the disastrous customer-pays model, which would see Aussies foot the bill for a broker’s service”.
“This means the mortgage broker industry will stay a viable option for all Australians, not just the wealthy. This is a win for Aussies,” he said.
“It’s also a stark reminder on just how powerful some of the banks are and how they blatantly put profit before people. Thank goddess the brokers will stay in the market to keep competition alive.
“I applaud that both sides of politics have seen reason and finally put the customer before the big four’s agenda,” Mr White said.
Speaking prior to the announcement, Mortgage Choice CEO Susan Mitchell commented that while it was “very pleasing development to have the Labor Party reconsidering the consumer-pays [model]”, she warned that the implementation of a flat fee “could be just as destructive to competition”.
Ms Mitchell said: “Matt Comyn, in his testimony at the royal commission, actually suggested a fee that was 35 per cent of the current remuneration of a broker.”
“That would make the channel completely commercially non-viable.
“I don’t think that that would be what we need to protect competition. It would just send consumers back to the big banks. There would be no more competitive pressure on prices.”
Ms Mitchell added: “A flat fee is not the answer.”
More to come.
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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