The removal of trail commission would undermine the broker proposition, reduce competition in the financial sector and limit consumer choice, according to the director of a mortgage brokerage.
Speaking on The Adviser’s Elite Broker podcast, director of Axton Finance Clint Waters weighed in on the Productivity Commission’s recommendation to end the payment of trail commission to mortgage brokers.
“We all as brokers know that there is an incredible amount of work that goes into servicing existing clients — doing some top-ups and reviews and all the little things that happen in the background that don’t get much attention but take a lot of time,” Mr Waters said.
Mr Waters claimed that removing trail would undermine the broker-client relationship, noting that it incentivises brokers to service clients throughout the life of the loan.
“I think that what will happen is that it will greatly erode the value that a broker can provide to a client through their journey,” the director said.
“The clawback and the policies that are in place for performance of loans [are] definitely there for a reason. If the loan doesn’t perform, we don’t get paid.
“Some of the banks [also] contact us to make further inquiries as to what’s happening with the client.”
Mr Waters also noted the effect that removing trail would have on a broker’s ability to afford operating expenses.
“I’ve got to pay rent, I’ve got to pay staff, I’ve got to pay insurance, aggregation fees and marketing costs,” the director continued.
“It’s not too dissimilar to branch or a bank in that they’ve got similar sort of costs.”
In its final report, the PC acknowledged that if trail is removed, “upfront commission may rise as a consequence of such action”. Mr Waters agreed, noting that the current rate of upfront commission would not be a sustainable source of income.
“There’s true value that’s being provided there, and I think that if it did get changed in any significant way, there’d need be a shift in the upfront [commission] because it’s just not a sustainable model at 0.6 [of a percentage point],” Mr Waters continued.
The 16-year veteran of the broking industry also said that undermining the current remuneration model would increase churn, enhance the market power of incumbent banks and limit consumer choice.
“It’s inevitable that there’s going to be a ridiculous amount of churn, which I understand is a problem in the UK, and in Canada as well,” the director said.
“That would be a real shame for client outcomes, and it would deliver a lot of power back to the incumbent lenders.
“The challenger funders that are out there do a great job of providing real choice and arguably superior products, superior services and innovation — there’s no way that they’ll be able to compete if that status quo changes significantly. It would be a real loss for consumers.”