“We are certainly extremely disappointed with that outcome,” said Peter White, CEO of the Finance Brokers Association of Australia.
“A trailing commission is really a deferred upfront fee and is part of the legal agreement The impact will be upfront commissions and interest rates going up.”
Mortgage & Finance Association of Australia chief executive Mike Felton said the government’s stance on trail is at odds with commentary from ASIC and Treasury. “The upfront fee would have to increase to compensate for loss of the trail.”
He also warned Labor from supporting the shift to the user-paid fee. “That would be a shock to the system. Even if banks have to charge a fee equivalent to the cost of doing a deal internally, as the report suggests, their marginal cost is lower than a broker due to economies of scale, so banks will inevitably undercut the brokers. This could end up forcing customers to bank branches and entrench the big bank power, while making it harder for customers to access credit.
Mortgage brokers currently settle 59 per cent of all mortgages in Australia.
The industry said it could live with a “best interest” duty. Justifying its call for that duty, the royal commission final report said: “If, in practice, brokers were to act in the best interests of borrowers, there would be fewer cases where brokers act in ways that see lenders given wrong or incomplete information about the financial situation of loan applicants.
“But the first, and in my view essential, step to take is to bring the law into line with what consumers expect. They expect brokers to act in their best interests. Brokers should be obliged to do so.”
The report said it had been argued that trail commissions “stand as an incentive for brokers not to ‘switch’ borrowers in and out of different mortgage arrangements. It is said that the payment of trail commissions somehow keeps the broker ‘in touch’ with the borrower. But how and why the payment of trail commission is necessary to achieving either of these results has not been satisfactorily explained.”
Commissioner Kenneth Hayne said there was no reason to carve mortgage brokers out of the Future of Financial Advice (FOFA) reforms.
“I consider that after a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.”
The government said in its response to the report that from July 2020 it will require that the value of upfront commissions be linked to the amount drawn down by borrowers and not the loan amount, and ban campaign and volume-based commissions and payments. The industry is already shifting to this position.
It will ask the Council of Financial Regulators and Australian Competition and Consumer Commission (ACCC) to review in three years the impact of the best interest duty and removal of trail “and implications for consumer outcomes and competition of moving to a borrower pays remuneration structure for mortgage broking”.
The final report also said that “introducer” programs such as the one which embarrassed National Australia Bank during the hearings should be better controlled but not banned.
The final report said “Introducers must only act within the confines of their prescribed role. Entities must have systems in place to ensure that introducers do not exceed this role.”