The Mortgage & Finance Association of Australia (MFAA) strongly welcomes today’s announcement by the Federal Treasurer, the Hon Josh Frydenberg MP, that the Government will not be prohibiting trail commission on new loans, but rather will review their operation in three years’ time.
MFAA CEO Mike Felton said this was a great outcome for consumers, as the preservation of the mortgage broker channel would continue to promote competition in the home lending market, which protects customer choice and access to credit.
“Today’s announcement reflects the fact that the case for the removal of mortgage broker trail commission has not been made, nor has it been demonstrated that existing trail arrangements lead to poor customer outcomes,” Mr Felton said.
“It is also backed by commentary from both ASIC and the Treasury that suggests that consumer outcomes could in fact be worsened in the absence of trail with the possibility of increased churn, reduced quality and heightened conflicts.
“The Government should be congratulated for following this advice and protecting customer interests and mortgage broker viability.
“The MFAA believes that preserving trail commission protects consumer outcomes. Trail is contingent income that is only paid to a broker if the loan is not in arrears, is not refinanced and does not involve fraud.
“Trail is not guaranteed, and as such, is an important control mechanism that aligns the interests of brokers and their customers, and ensures that the broker focuses on the customer relationship rather than simply pursuing the next transaction,” Mr Felton said.
This announcement is consistent with the Treasury’s submissions to the Royal Commission and ASIC’s exhaustive, data-driven Review of Mortgage Broker Remuneration in 2017, which found no systemic evidence of poor outcomes for consumers linked to the broker commission structure.
The Treasury’s submission to the Royal Commission’s Interim Report indicated that the removal of trail would actually increase the incentive for brokers to seek transactions rather than customer satisfaction in the long term. In the submission, Treasury states that:
“…conflicts could be worsened absent existing claw-back mechanisms and trail commissions as the broker does not stand to lose the fee received if the loan ceases to perform.”
The ASIC broker remuneration Report 516 (March 2017) did not identify trail commission as directly leading to poor customer outcomes, and outlined its concerns that the removal of trail commission could actually cause adverse outcomes for the customer:
“The payment of ongoing trail commissions usually provides an incentive to aggregators and brokers to put forward higher quality loans where consumers are less likely to default on their obligations. However, the option to waive trail commissions in favour of an upfront payment removes this incentive and is likely to increase the risk that aggregators and brokers will be less selective about which loans they put through to the lender…”
“Trail commission for mortgage brokers is deeply misunderstood, and is often confused with ongoing commissions earned by other financial services providers,” Mr Felton said.
“They are not the same. Trail commission for brokers is contingent income that was once paid at the start of the loan, but which is now paid over the life of the loan, provided the loan remains in good standing.
“This system also aligns well with the broker business model. Brokers receive more than 70 per cent of their business from referrals and existing relationships*, so any broker who does not focus on supporting their customers for the life of the loan will not be in business very long,” Mr Felton said.
The removal of trail commission, and the significant control mechanism it brings, could also have turned brokers into hunters, promoting excessive churn in the Australian mortgage market.
Again, in its submission to the Royal Commission, Treasury noted:
“The removal of trails would, however, also reduce incentives for brokers to guard against arranging non-performing loans and to not unnecessarily switch consumers to alternative loans that do not provide for a better deal. Refinancing is not a costless exercise, with real costs for both lenders and borrowers. In the United Kingdom, where trails are not used, concern over churn has led lenders to pay retention fees to brokers to encourage consumers not to switch lenders but refinance at a different rate. Services provided by brokers to customers after a loan has been arranged could also be affected if trailing commissions were removed.”
“This decision by the Government represents a positive step forward for the industry, which acknowledges the work being done by the mortgage broking industry to reform, while putting the interests of the consumer first, which the industry will always support,” Mr Felton said.
*Deloitte Access Economics, The Value of Mortgage Broking, July 2018.