The Productivity Commissions has called for the end of trail commissions despite several associations, brokerages and banks warning against it.
In its much anticipated final report into Competition in the Australian Financial System, released last Friday (3 August), the government agency delivered several blows to the broking industry, the elimination of trail being the most significant.
“There is little if any evidence to substantiate the claim that trail commissions are a payment for the ongoing provision of services to borrowers. In practice, trail commissions have the effect of aligning the broker’s interests with those of the lender, rather than those of the borrower,” the Commission wrote.
As for upfront commission, it left it untouched, instead echoing the changes already underway by the Combined Industry Forum. Although it noted that while industry participants have committed to removing bonus commissions through the CIF, the “evidence of actual implementation of these commitments in thin on the ground”.
The report also recommended that the government impose a best interest duty on mortgage brokers; appoint an independent ‘Principal Integrity Officer’ to work within ADIs and report back to ASIC; and abolish clawbacks after two years and prohibit those fees from being passed on to borrowers, among other recommendations.
As part of its other findings into the home loan industry, the Commission stated that while many consumers believe they’re getting a better interest rate through brokers, it’s often on par with what’s available through the direct channel.
“And although consumers say they value the services brokers provide, this does not appear to extend to paying for them,” the report said.
However it did recognise the benefit brokers provide smaller lenders, giving them a chance to compete where they wouldn’t have otherwise. It estimated that each smaller lender would need to open 118 new branches to generate the equivalent market share currently achieved through brokers.
HomeLoan Experts was one of the broking groups that submitted a submission to the Productivity Commission’s draft report explaining why trail is important and why it should remain. The brokerage, which has a team of five people providing post-settlement services to clients, outlined all that it does in order to earn its trail.
Managing director Otto Dargan weighed in on the recommendation to ban trail following the release of the final report.
“Removing trail commission shifts our industry to focus on churning customers rather than being a long term adviser. This is ideal for lenders that cross sell multiple products and have large branch networks as their customers are stickier. In other words— it's perfect for the major banks,” he told MPA.
With the Productivity Commission report being just one of many in recent times parsing the broking industry, Dargan said the channel has “change fatigue”.
“We all want a professional industry going forward and the best way to achieve this is for the CIF to work with the government.”
“There are some issues raised [in the report] that could be addressed relatively easily by the CIF. For example, the idea of mortgage brokers’ trail being linked to certain obligations to service that client should at least be investigated.”