Industry representatives have welcomed the news that the government will delay its decision on abolishing trail but added that work is still needed to engage all sides of politics on the matter.
On Tuesday (12 March), Treasurer Josh Frydenberg announced that “following consultation with the mortgage broking industry and smaller lenders, the Coalition government has decided to not prohibit trail commissions on new loans but rather review their operation in three years‘ time”.
Both the abolition of trail and upfront commissions were recommended by commissioner Kenneth Hayne in his final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
While the government had initially said in its official response to the final report that it would ban trail commission payments for new mortgages from 1 July 2020, the Treasurer has now said that the removal on trail will instead be reviewed in three years’ time.
The review, to be undertaken by the Council of Financial Regulators and the Australian Competition and Consumer Commission (ACCC) will therefore look at both the impacts of removing trail as well as the feasibility of continuing upfront commission payments.
Several members of industry have welcomed the announcement, which was made on Tuesday afternoon.
Looking to the election
Speaking to The Adviser soon after the announcement, the managing director of the Finance Brokers Association of Australia (FBAA), Peter White, said: “We welcome this announcement, but we should be mindful that the whole consideration of reviewing trail commission is not off the table. The government is saying that in three years’ time, it is going to be reviewed. I think before we celebrate too hard, too fast, we have to be a little bit cautious to understand that the discussion isn’t over.
“It is certainly good news today, but we are mindful that there is a federal election to get through yet and [the decision on trail] will be subject to who is in power post mid-May.”
Mr White added that the FBAA and broker groups were “in constant communication with Labor in the coming weeks” and will continue dialogue with them “as industry goes forward”.
Mr White said the announcement confirms how out of touch Commissioner Hayne is and calls into question the findings of the royal commission.
“Hayne simply didn’t get it but it’s now the case that both sides of politics are now very clear on the importance of mortgage brokers.
“Both the Coalition and Labor recognise that the recommendations of the royal commission would in fact hand power back to the big four banks, which is an absurd result.”
He concluded: “It is a great thing to hear this [announcement], but I am aware that we need to get through an election, and if the Liberal Party is in power following the election, then it will be looked at again in three years’ time. So, while it is a great thing that Josh Frydenberg has heard the voice of brokers, I think we need greater certainty rather than this constant kick out.”
Case to remove trail ‘has not been made’
The CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, also welcomed the announcement, saying that it “represents a positive step forward for the industry, which acknowledges the work being done by the mortgage broking industry to reform, while putting the interests of the consumer first, which the industry will always support”.
The head of the association also said that the move “reflects the fact that the case for the removal of mortgage broker trail commission has not been made, nor has it been demonstrated that existing trail arrangements lead to poor customer outcomes”.
Specifically, Mr Felton noted that both ASIC and the Treasury had recognised that consumer outcomes could “be worsened in the absence of trail with the possibility of increased churn, reduced quality and heightened conflicts”, suggesting that trail commission payments to brokers had been “deeply misunderstood” and was often confused with ongoing commissions earned by other financial services providers, such as those paid in the wealth advice sector.
“They are not the same. Trail commission for brokers is contingent income that was once paid at the start of the loan, but which is now paid over the life of the loan, provided the loan remains in good standing,” he said.
“This system also aligns well with the broker business model. Brokers receive more than 70 per cent of their business from referrals and existing relationships, so any broker who does not focus on supporting their customers for the life of the loan will not be in business very long,” Mr Felton said.
The MFAA CEO continued: “The government should be congratulated for following this advice and protecting customer interests and mortgage broker viability.
“The MFAA believes that preserving trail commission protects consumer outcomes. Trail is contingent income that is only paid to a broker if the loan is not in arrears, is not refinanced and does not involve fraud.
“Trail is not guaranteed, and as such, is an important control mechanism that aligns the interests of brokers and their customers, and ensures that the broker focuses on the customer relationship rather than simply pursuing the next transaction,” Mr Felton concluded.
Aggregators have their say
Speaking on behalf of aggregation company Connective, executive director Mark Haron told The Adviser: “This is a welcome move from government, and we’re glad to see the Treasurer recognise the ramifications to customers as well as the implications of making significant changes to remuneration without reviewing it in more detail than what the royal commission was able to do.”
AFG CEO David Bailey also responded, urging the Labor Party to also “adopt this sensible policy heading into the election”.
“We have seen an understanding from both the government and Labor that mortgage brokers provide vital competitive pressure in home lending, by writing close to 60 percent of all home loans,” he said.
“It’s important that our industry not be a political football heading into an election so that the 26,000 small businesses, their families and, importantly, their customers have certainty about the future of the sector,” Mr Bailey warned.
He continued: “We welcome the fact that there’s been a broad understanding of the essential service that our industry provides and the need to maintain that ongoing service for our customers.
“Like the government, Labor has also recognised the importance of the industry, and it’s vital we go into the election with bipartisan policy.”
Mr Bailey concluded: “A well-regulated, viable mortgage broking industry is vital to competition. A wrong move will hand the big banks big profits at the expense of brokers, the non-major lenders and every Australian borrower.”
He said that AFG will continue to work with the government and the Labor opposition to ensure “a considered policy approach to the royal commission recommendations to avoid any negative impact from policy proposals”.
Current commission structure the ‘right outcome’ for customers
Likewise, the CEO of Aussie Home Loans, James Symond, said: “After a very strong campaign by our industry, the federal government now understands the importance of maintaining the current upfront and trail commission structure for the 17,000 mortgage brokers who currently service borrowers across Australia.
“We believe the current commission structure provides the right outcome for our customers, while preserving competition in home lending and our thriving mortgage broking industry,” Mr Symond added.
He also encouraged all sides of politics to continue to “constructively engage with the mortgage broking industry to understand the valuable role played by brokers, who provide close to 60 per cent of mortgages in Australia”.
He concluded: “[This] announcement is a positive step by the Treasurer and provides a good time frame for this consultation process to take place”.
Susan Mitchell, the CEO of Mortgage Choice also said she “wholeheartedly support[s] Treasurer Frydenberg’s announcement to maintain trail commissions” for the near future, adding: “We believe that maintaining trail commission will ensure a strong mortgage broking industry and allow brokers to continue to guide Australian borrowers through what may be the most significant financial commitment of their lives – buying their home.”
Some lenders have also released their intial reactions, with Anthony Waldron, NAB’s executive general manager, broker partnerships at chair of the Combined Industry Forum staying: “Brokers are critically important for competition in the mortgage market and this approach will help ensure customers will continue to have access to a viable and competitive home lending market.”
Non-bank lender Pepper also voiced its support of the change in stance, with Aaron Milburn, director of sales and distribution at Pepper Money, saying: “Pepper Money welcomes the government’s acknowledgment today of the importance of the mortgage broking industry and the reversal of their decision to ban trailing commissions.
“We recognise mortgage brokers play an important role in supporting competition in the industry and helping borrowers from all walks of life get the loan they need. That’s why we will continue to be a leading advocate on the issue of retaining the current remuneration model for brokers and, most importantly, their families.”
[Related: Treasurer delays trail abolition date]
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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