Originally published 7th August 2018
As many of you know, the Productivity Commission (PC) released its Inquiry Report on Competition in the Australian Financial System on Friday.
While we will be following up with Government and regulators on the key issues over the coming weeks and months, I wanted to communicate with you on our responses to some of these critical issues.
Below is a summary of the key issues and our position on each, followed by a more detailed analysis of the PC’s recommendations.
MFAA Response – summary:
• While it is important to remember these are only recommendations, the MFAA strongly disagrees with the PC’s recommendation that trail commissions on home loans should be abolished:
- Neither ASIC nor Treasury has called for the banning of trail commissions.
- The PC has claimed there is no evidence that trail commissions incentivise brokers to achieve good customer outcomes.
- In fact, while removing trail would benefit lenders, there is no consumer benefit associated with removing trail, nor any evidence that these commissions create poor outcomes for customers.
- Trail is an important control mechanism. It is contingent income that is only paid if the loan remains appropriate. It discourages churn, incentivises quality, aligns the broker’s interests with the customer’s, and allows the broker to provide service over the life of the loan.
- If trail were abolished, upfront commissions would need to increase so brokers’ net earnings are not impacted - broker businesses are vulnerable to reductions in income and the removal of the broker’s ability to generate annuity value.
- Removal of trail would weaken the broker channel, decreasing choice, competition and service - particularly in regional Australia.
• The PC has proposed that the current upfront commission structure remains, ruled out any form of fee for service, and acknowledged that it is important that broker businesses remain commercially viable.
• Whilst we believe more can be done on a “positive duty” to act in the customers’ interests, the PC has recommended the introduction of a best interests test which is inappropriate and impractical.
• The PC’s Report calls for an end to volume and campaign commissions. These payments have already ceased - and this has been communicated by the Combined Industry Forum (CIF) to both ASIC and Treasury.
• The Report also suggested that the period for clawback be limited by ASIC to 18 to 24 months. As you will be aware, this is already reasonably standard across the industry.
A positive outcome is that the Report has acknowledged that brokers drive competition. While we can disagree on the methodology used to enact reform, we can agree that any proposal that would weaken the broker channel is not advisable.
However, these are critical issues. Some of these recommendations could weaken the broker channel and drive brokers out of the industry, leaving many consumers with a vastly reduced choice of lender and product.
While we believe many of the key stakeholders within Government do not agree with the idea of abolishing trail commissions, we will continue to actively advocate with key decision makers against these recommendations, to protect competition and consumers over the coming weeks and months.
This industry creates great outcomes for customers, and the reforms being put in place by the CIF will continue to strengthen those outcomes. We will ensure those who create policy understand this.