Lenders, including three of the big four banks, have reacted to the federal government’s decision to lift its proposed ban on the payment of trailing commission to mortgage brokers.
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 of trail will instead be reviewed in three years’ time.
Reacting to the news, Heritage Bank head of broker distribution Stewart Saunders said the government’s decision will serve the overall best interests of customers and protect the viability of the broker channel.
In a statement to The Adviser, Mr Saunders said the Hayne royal commission’s recommendation to abolish trail was “well-intentioned but flawed”.
“Abolishing trail would severely compromise the viability of the broker channel, which is a vital channel through which smaller banks can compete with the big four,” Mr Saunders said.
“Without brokers, smaller lenders like Heritage just can’t access home loan customers outside our branch footprint.
“Disrupting the broker channel would deliver even greater market share to the big banks, even though it was their poor behaviour that prompted the need for the royal commission in the first place.”
He added: “Trail commissions also link broker remuneration directly to customer outcomes, as it’s only paid if the loan is not in arrears, is not refinanced and does not involve fraud. Without trail, alternative mechanisms would need to be considered in order to ensure better customer outcomes.
Mr Saunders concluded by stating that the federal government’s decision to review the impacts of banning commissions is a “very sensible move” that would “provide the time needed to work out how to implement the aims of the Hayne recommendations without flattening the broker sector”.
MyState Bank also welcomed the government’s policy revision, with Tony MacRae, general manager of banking, stating that the move would facilitate further collaboration between stakeholders in order to achieve a positive outcome.
“We see the federal government’s announcement as a positive step to ensure the long-term viability of the broker channel,” Mr MacRae said.
“Maintaining the viability of the mortgage broking channel will safeguard customer choice while also allowing regional banks, like ourselves, to be an important part of that choice in the biggest financial decision of a customer’s life.”
He continued: “The recent government announcement provides a window of opportunity for the industry to continue to work together to assess all potential alternative broker remuneration structures, which maintain the viability of the broker industry, foster competition and protect customer choice.”
When asked if MyState would rule out a move to an alternative remuneration structure without industry consensus, Mr MacRae said: “MyState Bank would always work with the mortgage broking community on any changes to remuneration structures, with maintaining the viability of the channel as our top priority.”
The Adviser also reached out to the major banks for their reaction to the government’s decision.
A NAB spokesperson recently said that the government’s approach would “help ensure customers will continue to have access to a viable and competitive home lending market”.
The Commonwealth Bank of Australia (CBA) and Westpac did not explicitly endorse the Coalition government’s policy revision but noted their commitment to the broker channel.
CBA’s general manager of third party banking, Adam Croucher, told The Adviser: “Building a strong and sustainable third-party channel has always been a key pillar of Commonwealth Bank’s Home Buying strategy and that remains unchanged.
“We remain completely committed to the mortgage broking channel and continue to invest heavily to support brokers.
“We note the recent discussions about broker remuneration structures and will continue to engage with all of our stakeholders in these discussions.”
A Westpac spokesperson added: “We want to see a viable broker market. Brokers are an important driver of competition and valued by many of our customers.
“We support careful consideration to any changes given potential unintended consequences.”
The Adviser approached ANZ for commentary, but the bank is yet to provide a response.
The third-party industry, however, has strongly endorsed the federal government’s decision to revoke its ban on trail commissions.
The Finance Brokers Association of Australia, the Mortgage and Finance Association of Australia, Mortgage Choice, AFG, Connective, Aussie Home Loans, Loan Market, and Finsure, have all issued response in support of the change.