A panel of representatives from the mortgage and broking industry has noted the complex task of changing broker remuneration and the potential negative ramifications of doing so.
Speaking during a roundtable discussion around the impacts of the banking royal commission recommendations on the mortgage broking industry at the AFR Banking & Wealth Summit this week, the director of aggregation company Connective and deputy chair of the Combined Industry Forum, Mark Haron, highlighted that conflicted remuneration is not necessarily harmful to customers, it is “how you manage those conflicts”.
Mr Haron said: “There is always conflict. It’s [about] how you manage those conflicts, how you make sure you are very transparent where those conflicts are.”
Noting the work that the Combined Industry Forum had undertaken to provide clarity around remuneration as part of its package of reforms, Mr Haron said that these had been “broadly welcomed by government and by opposition”.
However, he said that understanding how trail commissions came about and why they are paid to brokers is important.
Speaking on the Mortgage Brokers: The eye of the storm roundtable, Mr Haron told delegates: “All it is is deferring the upfront payment. The banks, 20 years ago, were paying [commissions] all upfront and they said: ‘Commercially, this is not viable for us, we’d rather give you half now and give you half through this mechanism we’re going to call trail’. And that is how it all paid out. It was certainly not a fee that any customer was paying directly.”
Meanwhile, the CEO of Mortgage Choice, Susan Mitchell, reiterated her support of the current remuneration structure, adding that any moves to remove trail could cause several “problems” for brokers, lenders and customers alike.
Ms Mitchell said: “The real effect, I think, of missing the trail [commission] is that, if you move to the front fee and you have value leakage, that would be the first problem.
“The second problem would be that these are small businesses, [brokers] have arranged their world and their life on this continuous flow and they offer their services to their customers probably above and beyond what they would do if they were more focused on the individual transactions. So, that customer experience will change [without trail], and I think that is going to be the biggest effect.”
The head of the broking brand added that there are currently several hoops that brokers need to jump through in order to receive commissions, both upfront and trail.
She elaborated: “There are many catches in the way that trail is paid. For instance, a broker doesn’t receive trail if a loan goes into arrears – so if the broker has put the customer into a loan they can’t afford, the broker doesn’t get paid for what they do. If they haven’t picked the correct loan for the customer and the customer refinances, say in 18 months, they lose all their remuneration.
“So, there are many checks and balances, [which means] that you can actually keep a behaviour of a broker in line because you are actually withholding some of that revenue.”
This sentiment was echoed by CoreLogic International’s CEO, Lisa Claes, who said that lenders also benefit from trail commission.
Ms Claes said: “The economics alone are constructed [so that] banks don’t start to make any return on a loan into the third or fourth year, so there is something in their interest to pay a broker to keep that loan on the book.”
While Ms Claes noted that there is an argument to be made for customers to be “unshackled” and “slippery”, she added that moving mortgages can be costly as it includes transfer of mortgage fees, legal fees, valuation, pest inspections, etc., “so there is a lot of unseen costs that surround any shift,” she said, adding that it is “quite an emotionally, economic, intensive process”.
The CoreLogic CEO added that a balance needs to be struck as “you’ve got to temper the necessity to inject some longevity into a loan” with customer mobility that does not impact the customer’s “best interests” (should such a requirement be imposed on the broking industry).
The panel emphasised that lobbying and talks with both political parties were ongoing, with Ms Mitchell adding that while Labor’s proposal to introduce a commission cap of 1.1 per cent was a “marker” of where things could go, she added that she did not believe that the figure was appropriate compensation for a lifetime of trailing commissions.