The mortgage broking industry has welcomed the Australian Labor Party’s commitment not to implement a borrower-pays remuneration model if elected.
The Australian Labor Party (ALP) 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 Kenneth 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, Labor has softened its position.
Instead of recommending that the consumer pays a mortgage broker a fee, Labor has proposed that lenders instead pay brokers a standardised upfront commission, capped at 1.1 per cent, as a proportion of the drawn down loan amount.
The ALP has also said it would ban the payment of other incentives to brokers by lenders and limit the clawback period to two years after a loan is settled.
However, like the Coalition government, the Labor opposition would, if elected, ban trail commissions for brokers for new loans from 1 July 2020.
‘Effective’ in protecting industry viability
Reacting to Labor’s announcement, CEO of the Mortgage and Finance Association of Australia (MFAA), Mike Felton, welcomed the opposition’s policy reversal.
Mr Felton said that the 1.1 per cent upfront cap would ensure that upfront commissions are “retained at a level which ensures mortgage broker viability”, while also protecting competition, choice and access to credit.
The MFAA CEO added that he will continue to champion the case for the preservation of trailing commission, but that Labor’s proposal would be an “effective” compromise.
“We do not believe that the case for the removal of trail commissions has been made and will continue to argue for trail to be retained; however, given that the Productivity Commission, the royal commission, the government and now the opposition have called for trail to be removed, our priority has to be on protecting the viability of the mortgage broking industry,” he said.
“In this regard, increasing upfront commissions to 1.1 per cent to the broker would be an effective way of protecting broker business viability in circumstances where trail is removed.”
However, Mr Felton noted that the upfront payment would not include the component that is needed to sustain aggregation or broker group services.
“This means that lender payments will need to be higher to ensure that these necessary services are covered, whilst maintaining the 1.1 percent commission payment to brokers,” he continued.
“Retention of commissions that reflect the value that mortgage brokers generate for their clients will help protect good consumer outcomes, while sparing Australian borrowers a new multi-thousand-dollar fee every time they wish to apply for a loan or try to refinance their mortgage.”
Mr Felton added: “Make no mistake. A consumer-paid fee for service would make it harder and more expensive to get a home loan.
“We are pleased to see that both the government and opposition have acknowledged this through their responses.”
He concluded: “There are still details to be discussed, and we look forward to having further dialogue with the shadow treasurer and the shadow minister for financial services in this regard.”
Clawback protections needed
The managing director of the Finance Brokers Association of Australia, Peter White, has also welcomed Labor’s proposal, stating that it would ease uncertainty among brokers.
“This announcement provides some much-needed clarity for brokers moving forward, while also ensuring transparency on commissions,” he said.
“We will continue dialogue with both sides of politics to further shape the end model so that the borrower wins and competition in the market is maintained.”
However, Mr White called for reform to clawback arrangements.
“There needs to be some protective mechanism in place, and that will be one of the key issues for us moving forward,” he continued.
Mr White said that both sides of politics should be congratulated for their willingness to listen to the industry but added that “talks are not over yet”.
Consultative approach is welcome news
Speaking to The Adviser, CEO of the Australian Finance Group, David Bailey, said that he is pleased that the Labor Party consulted with industry before making an official announcement, rather than proposing a “knee-jerk” policy framework.
“The Labor Party [has] come out and taken customer-pays off the table, which is a fantastic result and a fantastic recognition of the value of brokers to the marketplace,” he said.
“What we’re looking forward to now is engaging [with policymakers] on what that model looks like moving forward.
“What we’ve been willing and wanting to do all along is engage in a decent conversation and we’re pleased we can have that now.”
Recognition of industry value
Aussie Home Loans CEO James Symond said the ALP’s move away from a borrower-pays model was in recognition of the harm it would inflict on the broking industry.
“The Labor Party has recognised that mortgage brokers provide a very important service to borrowers across Australia, creating competition in the home loan sector with 66 per cent of loans provided by Aussie to consumers from 18 second-tier lenders on our panel of 22 lenders,” he said.
“It is clear from our research that borrowers will not remunerate brokers. It appears as though lenders will continue to fulfil that role; however, the payments will need to be set at a level which continue to make the mortgage broker business model viable.
“We look forward to consulting with the federal government and Labor Party to ensure that any future changes do not negatively impact borrowers, while ensuring the ongoing viability of the mortgage broker industry.”
‘It’s a good start’
Mortgage Choice CEO Susan Mitchell also welcomed the proposal but reiterated her call for recognition of the post-settlement services offered by brokers.
“It’s a good start. However, more consideration needs to be given to all the work brokers do for customers post-settlement,” she said.
“A fixed upfront commission rate paid by the lender comes with its own challenges, however. The devil is in the details.
“A fixed upfront commission rate suggests that the broker’s work is done once a loan is settled. It will also change the dynamic of the broker/customer relationship, which is likely to become more transactional rather than relationship based.”
Ms Mitchell concluded: “Mortgage Choice encourages both sides of government to continue consultation with the mortgage broking industry to work through the intricacies of how a fixed upfront commission rate would be implemented.”
More consultation needed
Connective director Mark Haron said that while he’s pleased with Labor’s decision, there’s still more work to be done to address the “nuances” of the policy proposals.
“There’s still a number of things to work through with both major parties in respect to what they’ve put on the table,” he said.
The director added that more consultation is needed regarding the bipartisan support for a ban on trailing commission.
“Neither party has given us a good reason as to why trail commissions should be walked away from at this particular point in time,” Mr Haron said.
However, according to Mr Haron, it is unlikely that further details regarding both the Coalition and the Labor Party’s remuneration policies would be released prior to the upcoming federal election.
He concluded: “Until there are stated positions on either side and until we’re able to work towards what it is that they want, it’s not likely that we’ll see something come out through the process prior to the election in terms of change or implementation of the legislation.”
[Related: ALP announces broker remuneration policy]
Charbel Kadib is the news editor on The Adviser and Mortgage Business.
Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.
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