'Clear indication' trail commission will not be banned, says mortgage chief

by Julia Corderoy26 Aug 2016
Trail commission is unlikely to banned as a part of ASIC’s remuneration review of the mortgage broking sector, the chief executive of a major mortgage franchise has said.

Speaking at the release of Mortgage Choice’s FY2016 annual results, CEO John Flavell said it is doubtful ASIC will follow the lead of its global counterparts and ban trail commission in mortgage lending. 

“In my discussion with the regulator, there is an understanding and there is an acknowledgement that the amount of energy and effort associated with identifying a customer and having their needs met in the first instance is not insignificant and you get an upfront commission for that,” Flavell told Australian Broker.

“Equally, having a broker engage with a customer on an ongoing basis to make sure that the services they have in place are adequate and meet their needs, and they’re changed as required when a customer’s needs change also makes a lot of sense.”

Earlier this year the future of trail commissions was bought into question when the former CEO of Mortgages at Barclays in the UK and former general manager of broker platforms at NAB, Steve Weston, told brokers about the major differences between the third party markets in Australia and the UK. In the UK, he said, trail commissions don’t exist and the upfront commission is much lower.

However, Flavell said that the future of trail commission in Australia – and ASIC’s view of trail commissions – is obvious. He said the Financial System Inquiry’s recommendation in regards to life insurance is a “clear indication” of how comfortable the regulator is in terms of trail delivering positive outcomes for consumers.  

“…one of the recommendations in relation to life insurance was that where life insurance agents were receiving maybe 120% or 130% of the first year’s premium in commission and no trailing commission to service that customer, then that led to a disproportionately large amount of churn which destroys the economics of their business,” he said. 

“So what has been mooted and was to be legislated, prior to the election stopping those legislative changes, was that over the next three years the proportion of first year’s premium to be made available in terms of commission payments to life would come down to 65% of the first year’s premium and then the ongoing renewal commission paid to an adviser would be 22%. 

“The shape and the quantum of that is not inconsistent to the shape and quantum we have got for commissions in mortgage broking, and if that is any sort of guide in relation to where logic sits and maybe where the regulator is thinking then that would suggest that the approach we have got to commissions is sound.”

Over FY2016, Mortgage Choice’s core broking business recorded its best ever settlement result, with settlements up 6.3%, totalling $12.2 billion. The franchise’s total loan book was up 4.4% on the previous financial year, growing to $51.7 billion. 

Net profit after tax on a cash basis was $20.5 million, up 10.7% on FY2015 and its total dividend for the year was 16.5 cents per share – a new high for the company and an increase of one cent on FY2015.