The federal Labor opposition’s position on broker remuneration is not “fixed” but it is yet to be sold on trailing commissions, according to the head of a major aggregator.
Loan Market’s executive chairman, Sam White, has been meeting with policymakers ahead of the upcoming federal election to discuss proposed broking industry reforms in response to the banking royal commission.
Mr White told The Adviser that he’s been “encouraged” by the consultation process, stating that he believes the Australian Labor Party (ALP) is open to revising its proposal to ban trail commissions paid to mortgage brokers and cap upfront commissions at 1.1 per cent.
“I don’t think [the ALP position is] fixed,” he said. “I think they’ve shown a willingness to listen, and we’ve had a number of meetings with ministers and with their advisers.”
The aggregator head said that while the Labor opposition remains resistant to retaining trailing commissions, it has been open to considering compromises, including the introduction of a deferred upfront model.
“I think they’re still finding it very hard to move away from the concept of trail,” Mr White said.
“The concept of deferred upfronts are being spoken about – where there is a fixed rate, some paid upfront and some paid over five years with a rate slightly higher than the 1.1 per cent.”
Despite reiterating his support for the current remuneration model – also backed by the Coalition government – Mr White said that a deferred model would produce better outcomes for brokers and their customers, and warned of the risks associated with Labor’s current proposal.
“If [Labor’s proposal] comes in, the incentive moves away from trying to solve a current problem with a lender to just move the client,” he said. “That’s not a great customer outcome and the politicians understand that.”
He continued: “[Politicians] realise that the broker channel is the only channel that’s truly customer-centric.
“Brokers are product agnostic, they’re lender agnostic, all they truly care about is making sure that the customer is happy.”
Mr White also stated that a flat fixed upfront model would contradict the regulatory approach to the remuneration of banking executives under the Banking Executive Accountability Regime (BEAR).
The BEAR regime was designed to disincentivise a sales culture within banks, in favour of a model that would defer executive remuneration and base it on outcomes delivered overtime.
“Moving from an upfront goes against everything they’ve been pushing for the banks to adopt,” Mr White said.
According to the Loan Market head, a deferred upfront broker remuneration model would be most aligned with provisions under the BEAR regime, and would also alleviate Labor’s concerns over “lender-choice conflicts” in the remuneration model.
However, Mr White said that a deferred upfront commission of 1.1 per cent would not be sufficient, citing costs associated with the existing structure.
“If you look at the net present value of the remuneration model, it’s somewhere between 1.1 per cent and 1.5 per cent, and of course you’ve got the clawback and net of offset in there,” he said.
“The clawback and net of offset really reduce that overall commission, down by probably 10-15 per cent.”
This is part of the mix, there’s whatever remuneration is, whatever clawbacks are, and whatever net of offset calculations are.
Mr White also stated that added costs associated with the proposed introduction of a best interests duty would also need to be considered before determining a new upfront fee.
“A lot of us are being asked to design a remuneration model without fully understanding what the best interests duty costs will be on the industry, both for brokers and for aggregators,” he said.
“It may well be that because of the expectations of what gets done, we need to have an increase in remuneration to reflect those extra costs.”
The Loan Market chairman concluded by encouraging the broader broking community to continue its advocacy work beyond the federal election.
“The next few weeks will be busy and messy, but after that we still need to maintain our relationships as legislation is proposed and passed,” he said.
“Whatever side gets in, that quarter to September/October is when a lot of the policy proposals get debated.
“That’s when we really need to be actively talking to local members and senators about why [changes] are either good or bad for customers.”
[Related: Bank CEO backs deferred upfront model]