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The mortgage industry has reacted to the Productivity Commission’s final report into competition in the Australian financial system, reopening the debate on broker commission, clawbacks and customer outcomes.
Released on 3 August, the 686-page document dedicates an entire chapter to mortgage brokers and their ability to enhance market competition; the first page of which reads, “Trail commissions should be abolished”.
Further, the report states commission clawbacks “should not be allowed beyond two years” and passing clawbacks on to the borrower “should be banned.”
In explanation, it continued, “Trail commissions and commission clawbacks create a range of incentives for brokers, some of which are clearly inconsistent with acting in a customer’s best interest. Brokers’ reliance on ongoing client relationships may create a counterweight, but remuneration arrangements can still result in poor consumer outcomes.
Responding via statement over the weekend, MFAA CEO Mike Felton, said, “Trail is an important control mechanism. It discourages excessive churn, incentivises quality, aligns the interests of all stakeholders in the value chain with those of the customer, and also allows the broker to continue to provide service over the life of the loan."
He continued, “If trail were to be abolished, upfront commissions would need to increase substantially so brokers’ net earnings are not impacted over the life of the loan. This would equate to the Canadian model that for example pays an average upfront of 1.1%.”
Speaking to Australian Broker, head of Trail Homes Nick Young, said, “I’m disappointed although not surprised. This is in distinct contrast to ASIC and the Treasury’s findings and those findings were made – particularly in regard to ASIC – after very extensive research.
“By effectively cutting trail commissions very significantly in the remuneration of brokers, the whole industry will be under immense pressure. As a consequence we will see a very significant decline in competition and that is not in the interests of anybody,” he continued.
“The other issue is that they are suggesting perhaps increasing upfront commissions to potentially cover this, which again is not in the consumers’ interests. The final thing is there will also be no incentive to provide ongoing service to clients. As I say I’m disappointed – I thought the conversation had moved beyond this and it’s a shame to see this sort of thing being rehashed,” Young added.
Best interest obligation
Further promoting better customer outcomes, the report also suggest the government impose a “best interest obligation on credit licensees that provide credit or credit services (both individuals and corporate entities) in relation to home loans. This should be implemented through the existing credit licensing legislation.”
The report itself detailed the “mixed response” this received, with FBAA, Money Quest and Choice quoted as supporting the suggestion. On the other hand, a submission from AFG highlighted how current NCCP legislation already covered such obligations, while REA Group questioned the practicalities of implementation.
Felton added, “With regard to a ‘best interests’ duty, we agree that more can be done with regards to having a ‘positive duty’ to act in the customers’ interests. However, we don’t agree that a best interests test, like that now used in financial advice, would be appropriate.”
Meanwhile the Australian Banking Association released a statement on 3rd August, briefly underlining the “positive impact of mortgage broking”.
It concluded, “The Australian Banking Association and its members look forward to considering the Productivity Commissions report and findings in full.”
While the Productivity Commission report acknowledges that brokers originated approximately 54% of all new home loans to December 2017, it claims “the pro‑competitive effects” of brokers have declined since the 1990s. Specifically referring to the large proportion of lender-owned aggregators, it states, “The revolution has become part of the establishment.”
