Industry urged to get on the front foot of trail messaging

During the course of the panel, Mr Carter noted the royal commission’s focus on broker remuneration – particularly in regard to trail commission – and the political response to the final report recommendations.

The banking and wealth CEO said the fact that broker remuneration became such a big topic of conversation “took [him] by complete surprise” given “what else was being heard [during the hearings]”.

He added that the fact that the royal commission’s final recommendations were so radical showed that the people who critique the industry often “have a very limited understanding of the client of an adviser or a broker”.

Despite this, he warned that because the “very educated people” of the royal commission did not seem to understand the value of trail commission, it was therefore doubly important that the industry worked hard to ensure that the messaging around commissions was clear and easy for the average person to understand.

Indeed, the panel warned that as government and regulator action was often brought in to “address the lowest common denominator” or the worst potential outcomes, any behaviours or risks that threatened the commission model needed to be stamped out before the Council of Financial Regulators and the Australian Competition and Consumer Commission review the impacts of removing trail and the feasibility of continuing upfront commission payments in three years’ time.

Mr Carter therefore called on the industry associations, professional brokers and industry as a whole to work to identify and eliminate the behaviours that concerned the royal commission around commission-based remuneration models, and “think about what you have to do to explain to the minority of people who don’t get it”.

Likewise, Mr Mair said the industry needed to “get crisper in explaining what people are doing for trail commission or renewal commission” given some participants were still unclear of its utility. He urged delegates to provide transparency on “what you are getting and what you are doing for it” and work to ensure these messages are heard sooner rather than later.

“Don’t think of it as a review in three years’ time,” Mr Mair said, “you will need to prepare earlier.”

Speaking to The Adviser following the panel, Mr Carter elaborated: “The behaviours that were highlighted during the royal commission process caused people to focus very much on remuneration and I think it is beholden on all parties in the industry to really spend some time and think about the behaviours that caused concern about commission-based remuneration models and address them.

“I think that goes to professional standards. I think that goes to real consequences for people who aren’t behaving well. I think that goes to remuneration structures where commission is used as well as other incentive models, and I think it goes to the behaviour of aggregators and brokers in demonstrating that the basis of the recommendation had nothing to do with the way they were going to get paid either in hard dollars or soft dollars,” he said.

Looking at ongoing payments, such as trail, Mr Carter noted that the royal commission had specifically asked what the value of trail was to the customer and “were unclear or found it very difficult to understand what value someone was getting several years later and why someone should be paying for that”.

“Whilst that was more directly asked of mortgage broking and implicitly – if not explicitly – around financial advisers, I do think the general insurance broking world will also have to make sure they’ve addressed the same question,” he added.

Suncorp’s banking and wealth CEO went on to say that he believed the Coalition government’s backflip on the immediate future of commissions (which he joked was “worthy of Olympic diving” and “highlights the fickleness of retail politics”) was “a rational outcome” because “so many people use brokers and the consequences of getting it wrong is, therefore, significant”.

“But,” he concluded, “I do think it is important for everyone in the sector to think about why it became a topic of conversation in the first place.”

While the conversation around broker commissions has quietened down following the Coalition government’s election win (and its pledge to kick out the remuneration review to three years’ time), the CEO of Mortgage Choice recently suggested that she supported reforms to existing clawback arrangements to help offset losses incurred by brokers who – as per the banking royal commission’s recommendation – will no longer be permitted to charge borrowers that have refinanced or defaulted on their home loan within the clawback period.

Speaking to The Adviser earlier this month, Ms Mitchell said that while she believes the industry is “stuck” with clawbacks, arrangements could be reformed to ensure that lenders bear a larger portion of the loss in the first year of a loan term.   

“Unfortunately, because it fits within an overall remuneration structure, we’re kind of stuck with clawbacks,” she said. “But I think the important thing is to make it fairer for the broker,” she said.

[Related: ‘Trail commission not dead’: MFAA]