Draft regulations in the government’s best interests duty bill could, in practice, prohibit the payment of trail commissions, aggregators have told Treasury.
Aussie Home Loans and Connective have identified clauses in the federal government’s National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019, which could put trailing commissions at risk.
Section 28VA of the bill prohibits the payment or receipt of ‘monetary benefits’ for credit contracts that do not relate to:
- the provision of credit wholly or predominantly for the purpose of purchasing residential property; or
- the provision of credit wholly or predominantly for the purpose of refinancing credit that was provided wholly or predominantly for the purpose of purchasing residential property.
However, in a webinar hosted to discuss the aggregator’s submission to Treasury, Connective director Mark Haron observed that the proposed regulations do not specify the payment of upfront commissions and would therefore extend to trailing commissions.
“In its current format, the trouble we're seeing is that it effectively means that banks are going to have to go back and check on every existing loan that they're paying trail on to determine whether or not they're paying a portion of that trail on a conflicted remuneration component,” he said.
“If they can't work it out, then technically speaking, they can't pay the trail — It puts at risk trail.”
Aussie Home Loans has also sought clarity on aspects of the best interests duty, including what products it would apply to, while also pointing out potential issues associated with the definitions of conflicted remuneration.
Aussie has noted that section 28VB of the draft bill restricts the payment of remuneration for subsequent post-settlement drawdowns to 90 days, which under the proposed reforms, would apply to both upfront and trail commission.
As a result, Aussie has called on the government to explicitly exempt trail commission from the clause or extend the period for payment on subsequent drawdowns to 365 days.
“The effect of the proposed definition of drawdown amount in regulation 28VB would have the effect of potentially changing the basis of calculation for many existing loans with the result that remuneration for some mortgage brokers may be adversely affected in a way not intended by government,” Aussie stated.
“Given this, Aussie believes that the fairest way to approach this would be to exclude trail commission payments from the definition of conflicted remuneration.
“If Treasury remain resolved to apply conflicted remuneration provisions to trail payments then this should only apply in regards to credit contracts entered into on or after the effective date of the legislation, or the definition of the drawdown amount should be amended to include so much of the credit used up to 365 days from the date the consumer enters into the credit contract consistent with our earlier comments above.”
Both Connective and Aussie Home Loans noted that if current provisions within the draft bill are ratified, the Coalition government would be in breach of its commitment to preserve trail commission until at least 2022, when regulators are set to review broker remuneration.
Mr Haron said he does not believe that it was the government’s intention to cast uncertainty of the future of trail in its draft bill.
“We're very confident that we'll have that resolved with better drafting through this process and in further consultation,” he said.
The draft bill is expected to be tabled in Parliament in late November, with a view to ratifying the bill in time for the commencement date of 1 July 2020.
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