Removing trail commission would “decimate” mortgage brokers operating in regional and rural areas, a realestate.com.au Home Loans broker has lamented.
Speaking with The Adviser, George Smith-Roberts, a realestate.com.au Home Loans broker with offices in regional NSW and Queensland, said regional and rural brokers would be particularly adversely affected by the abolition of trail commissions, which the Productivity Commission recommended to the government in its final report on competition in the Australian financial system.
Mr Smith-Roberts added that regional brokers would have to consider how to restructure their business to remain viable, which is especially difficult when commissions are used to cover operating costs.
He lamented that many regional brokers could end up having to let staff go, shut up shop, and work from home until they figure out the next steps in their career.
“The way that our business is structured, the upfront commissions pay for offices, they pay for staff, they pay for legals and equipment, all of our running costs,” the realestate.com.au Home Loans broker said.
“I only earn what my trail commission is, and once that goes, businesses, particularly mine, will have to seriously think [about] how we structure ourselves and pull back.”
Mr Smith-Roberts further explained that it takes a few years before the trail commission is enough to support his business.
“Once it’s arrived in a position where it’s helping support your business, that then allows [brokers] to put on staff, open up offices, pay rent to landlords, and all those sorts of things,” he said.
“Unless we’re going to be compensated heavily on the upfront [commission], then they’re basically cutting our wage in half.
“It will absolutely decimate regional brokers.”
The realestate.com.au Home Loans broker additionally pointed out that a lot of regional loans have high loan-to-value ratios (LVRs), meaning that such loans can sit in a brokerage’s books for many years, throughout which the customer is continually serviced.
Further, in Mr Smith-Roberts’ view, trail commissions are “deferred payments” for the work brokers do for their clients.
He explained that, as a regional broker, the average loan size he is dealing with is between $250,000 and $280,000, which generates an upfront commission of about $1,200. He added that this is a small figure when taking into account the time and costs associated with organising a mortgage.
“We’re not writing million-dollar loans here. The city guys may be able to [partially offset the removal of trail commissions] on the larger loans with larger upfront [commissions], but the country guys are going to be decimated,” Mr Smith-Roberts said.
On top of that, the broker said that it’s regional customers that benefit the most from having a mortgage broker to identify the most suitable product and prepare loan applications on their behalf.
“They don’t have access to anyone but the big four banks in terms of branches,” Mr Smith-Roberts said.
“Most of the loans that we write are for clients that are [hundreds of kilometres away] from a branch.”
The realestate.com.au Home Loans broker told The Adviser that it’s very unlikely that clients will be switched to new products just so the broker can generate more revenue.
“We actually care about our clients and bend over backwards so that they get looked after. I won’t refinance a loan for a client unless it's absolutely necessary for the client, so we’re not about to go and move them just to get another upfront,” Mr Smith-Roberts said.
He admitted that he feels like “a big brother [is] stepping in to tell us what we should be doing for our business when we’re not doing anything wrong in the first place”.
However, the realestate.com.au Home Loans broker said he “could probably live with it” if the upfront commission was increased to cover the first three years of trail.
Mr Smith-Roberts is not alone in his disappointment with the Productivity Commission’s stance on trail commission, which was in line with the NSW Fair Trading’s view that prohibiting the payment of trail would ensure that it no longer contributes to “consumer detriment with higher prices”.
The head of trail book buyer Trail Homes, Nick Young, similarly told The Adviser that removing trail move would “decimate” the broking industry.
“Getting rid of trail, simplistically, would be absolutely devastating to the mortgage broking industry. Effectively, trail is half of a broker’s remuneration, on average, so if you take half the income away from any industry, you will decimate it,” Mr Young said.
Others pointed out what they believe to be flaws in the Productivity Commission’s findings.
For example, the director of Connective, Mark Haron said one of the things that was “fundamentally wrong” about the report was the assumption that the customer “is actually paying for this trail commission in some way, shape or form”.
“Customers are not paying for this, and there is strong evidence [through the MFAA’s Mortgage Broking Through a Different Lens pack] to show that broker activity leads to reduced interest rates to consumers,” the director said.
Mr Haron further noted that the trail recommendation is “completely at odds with Treasury’s report to the royal commission recently”.