The association is continuing to defend trail commissions and is advocating for its survival despite plans to ban the remuneration structure for new loans from next year, the CEO has said.
Speaking on The Adviser’s In Focus podcast, the CEO of the Mortgage & Finance Association of Australia Mike Felton said that he believed that the abolition of trail commissions (as recommended by the royal commission’s final report and adopted in the government and Labor Party’s responses to the royal commission) was not set in stone.
Mr Felton said: “I think that is still up in the air, I don’t think it’s dead. Obviously you have a royal commission, the Productivity Commission, government and Labor that have all called for its removal but we absolutely and emphatically state that the case has not been made for the abolition of trail.”
He continued: “In fact, if you look at the Treasury submission to the royal commission interim report, they in fact state that conflicts in the absence of a control mechanism, such as trail, would be worsened. So, it’s not going to improve the outcome, it’s actually going to worsen the outcome. So, we have spent a lot of time speaking to all sides of politics stating that it used to be paid upfront, it then became contingent income upon a good outcome being produced and how that control mechanism aligns interests and actually produces a better consumer outcome on average over the long-term.
“We will continue to get the message out there and believe that it still has some way to go before that is finalised, but clearly there is a lot of challenge to it.”
Mr Felton suggested that brokers reaching out to politicians and pushing out campaigns should ensure that their messages “protect the current economics”.
“That needs to be the key output here – there will be a significant amount of work done as we work through [the fallout from the royal commission]... clearly some of the recommendations, when you look at them at face value, don’t work in their current format. The economics, simply, will be too lopsided one way or another as you go and look at different times in a loan life. But, I think if there is a commitment to maintaining and protecting the current economics, that becomes a worthwhile exercise that you can then work through.
“I would say that needs to be the message: protect the viability of the channel by protecting current economics.”
The MFAA CEO’s stance on trail commissions echo those made by the managing director of the Finance Brokers Association of Australia (FBAA) Peter White, who recently told delegates at the Better Business Summit in Melbourne that conversations were still being had to advocate for trail commissions but industry should be aware of the “new reality”.
Speaking to The Adviser this week, Mr White elaborated: “We are fighting not to lose trail, we are fighting to retain the current structure. But the reality is that both sides of politics have said that trail should stop 1 July 2020.
“This hasn’t changed and we have to be careful that we don’t become delusional and wear rose-coloured glasses for something that might not exist. As much as we don’t like it and need to fight it, we have to deal with the realities today, and the reality is that the two main political parties think it should be all in an upfront and not paid over time in trail. But miracles do happen.”
Mr White said that the FBAA was “championing and reinvigorating a new campaign, which is more relevant to where things are at in the market today”, adding that brokers should still support these campaigns and sign the petition at change.org “because if you take the foot off the head of the tiger, the bastard is going to bite you”.
The managing director of the broker association continued: “The reality is that we’ve got to keep the pressure on the politicians to minimise the change or potential risks to the industry. So, we would all like to see things not change, but the reality is that the conversations politically are saying that trail is gone.
“In that conversation, trail is always seen as a deferred upfront, so the upfront is being bulked up under the current [Labor] plans – which is including, roughly, four years of trail. That is how they arrived at the 1.1 per cent (based on ASIC’s findings in its remuneration report that brokers get, on average, 0.54 up front and 0.14 trail. If the average life of a loan is four years, that is 1.1 per cent).”
He added: “What politicans are saying has gone is the ability to pay that upfront over a period of time, on a deferred basis. So, it is going to all be paid in one go from 1 July 2020.
“Currently, trail is more of a mechanism to get what you are paid upfront in a lay-by system. You get $2,500 today and the other $2,500 over time. Government and Labor are saying that they want this lay-by system to go, as the royal commissioner recommended, and that lenders should pay it all upfront, which is why Labor are speaking about this bulked up 1.1 per cent figure.
“I expect government will come out in the near future with a position statement with their take on it. It’s not like all brokers are going to get is 0.5 per cent upfront – they will get an upfront that incorporates the trail commission (based on a four-year loan).”
He concluded: “We need to optimise what we are getting, optimise the income we get and ensure we don’t lose the value of our businesses. We need to understand more granular details as to how this is going to play out – we have to deal with clawbacks, responsible lending obligations. The biggest risk out of this is having a two-tiered pricing structure where it becomes more expensive to go through brokers than through a bank branch, which certainly can’t happen.
“These are the things we need to have detail around to make sure that isn’t the unintended consequence. But we need to remember that these changes may not get through the House or the Senate, and there are plenty of senators and crossbenchers who are supportive of where we are today. So even if this legislation is created, they have to get the legislation through the House and that may be as big a hurdle as everything else.
“So, you never know, things may not change there. But if they do, we have to deal with the new world and we are better off grabbing the bull by the horns. There is a simple reality in this. These conversations are being had and I don’t think it is wise to ignore them. It is much smarter to deal with the realities.”
[Related: In Focus: Update on the royal commission]
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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