MFAA defends trail commissions amid Productivity Commission's critique

The MFAA has come to the defence of trail commissions, after a draft report released by the Government’s Productivity Commission last month described such compensation as “perverse incentives” for brokers by “rewarding them for keeping customers in their existing loan.”

The Commission’s report claimed that consumers are not given the best choice suited for them because of products are channelled through the “vertical integration” of brokers and other distribution channels.  “[M]ortgage brokers are not obliged by law to act in the best interests of the customer. And an important source of advice subsequent to the transaction is compromised, as trailing commissions encourage broker loyalty to the financial institution, not the customer.”

In a commentary of the Commission’s report, the MFAA said trail commissions do not restrict or discourage customer switching or refinancing.

Such compensations “ensure alignment” of interests between a lender, aggregator, broker, and customer over the life of a loan. “[W]hen a broker refinances a loan, their existing trail flow is replaced with a new trail flow, and the broker also has the possibility of earning an additional new upfront commission if they are refinancing with a different lender.”

Citing figures from other countries, the association added that markets without trail commissions see higher upfront commissions. In Canada for example, it said brokers earn an upfront commission between 0.90% and 1.40%, with the most common commission at 1.10%.

As trail is paid on the amortising value of a loan, it declines over time – but certain lenders have scaled their trail to remain competitive, MFAA said.

Considering the broker business model is built on positive customer relationships, with over 70%of business generated directly or indirectly via existing customers, brokers have a strong incentive to maintain contact with their customers over the life of the loan to ensure they have a competitive solution that is appropriate to their changing needs. Trail assists in funding such services over time,” it added.