The Royal Commission’s recommendation to remove upfront and trailing commissions paid to mortgage brokers was one of the most controversial ideas in the final report. It was one recommendation that both sides of politics did note fully endorse or accept at face value, and both sides have altered their original stance towards the recommendation. While upfront commissions remain, after initially saying it would prohibit the payment of trail commissions for new loans from July 2020, the government changed its position and will no longer ban trail commissions for mortgage brokers. Other changes however, will remain...
The commission said that all commissions to mortgage brokers be removed and replaced by upfront fees paid by the customer, rather than the lender - in order to remove “conflicts of interest” from the process. It also recommended new regulations requiring mortgage brokers to act in the best interests of borrowers or face civil penalties.
Trails To Stay
After initially saying it would prohibit the payment of trail commissions for new loans from July 2020, the government changed its position and will no longer ban trail commissions for mortgage brokers.
Instead, the government will get the Australian Competition and Consumer Commission (ACCC) and the Council on Federal Financial Relations (which comprises the federal and state treasurers) to hold a review into whether trail commissions should be kept from 2020 onwards.
Treasurer Frydenberg said the move was made after meetings with the mortgage broking sector and small lenders, and was driven by concerns about the "impact on competition in the mortgage lending market"
“Small lenders and mortgage brokers are an absolutely critical part of competition in that market — there are 17,000 small lenders, 17,000 mortgage brokers employing 26,000 people, and they write over half of the residential backed mortgages.”
"After consultation with the mortgage broking sector as well as small lenders, the government has decided that the trailing commission issue will now be the subject of the review by the ACCC and the Council on Federal Financial Relations in three years' time," Frydenberg said.
"So the abolition of trail commissions from July 2020 won't proceed as first announced."
Change Still To Occur
The Treasurer said the government would still pursue “the introduction of a number of new measures that the government has already announced” around changes to broking rules. These include imposing a legal obligation on mortgage brokers to act in the best interests of consumers, banning campaign and volume based commissions, and linking the value of upfront commissions to the amount drawn down by borrowers.
“These changes will address conflicts of interest in the industry by better aligning the interests of consumers and mortgage brokers,” the treasurer said.
The decision to no longer abolish trail commissions establishes a new point of difference with Labor.
Labor had already backed away from their initial stance of “implementing all the recommendations in full” after coming under lobbying pressure from the industry. Now they are proposing a fixed-rate commission for mortgage brokers rather than accept the banking royal commission recommendation to apply user-pay fees to the service.
Labor’s proposition would maintain the system in which the lender pays the upfront fee but double it to 1.1 per cent to make up for the loss of trail commissions.
Frydenburg said "Labor's decision to have a higher upfront fee will cause problems for competition in the sector. Because not all lenders have the ability to, with a strong balance sheet, to provide higher up-front fees."
Good Policy to Trump Politics?
Don’t get your hopes up! While this decision from the government has been welcomed by the broking sector, certainty is still not in place, with the caveat of a review already committed to. This gives the government the opportunity de-lineate themselves from Labor, but also to backtrack again if the need arises further down to track.
This much flipping and flopping from both major parties could be seen as a result of the intense pressure the pending election has places on both contenders. The timing of the release of the RC’s final report – just a few months from the federal election, has goaded both parties into rushing policy announcements merely to get the political jump on their opponents, perhaps it seems, without considering the full implications of their announcements.
After the RC, with the public respect for the finance industry at a level that could comfortably amble under a snake’s belly, politicians don’t want to be seen as “soft on the banks”. Anything they think will play well with the voting public is likely to get the green light in the lead up to polling day. It may be a forlorn hope that good policy might actually trump politics this close to an election, when both sides are keen to promote differences in the hope of landing that knockout blow to their opponent.
It is doubtful this will be the last backflip we’ll see.