Future of trail commissions a concern, says industry veteran

by Julia Corderoy16 Jun 2016
The mortgage broking sector in Australia should be concerned about the future of trail commissions as a part of ASIC’s remuneration review, an industry veteran has told brokers.

Speaking at the FBAA National Tour in Sydney today, Steve Weston, the former CEO of Mortgages at Barclays in the UK and former general manager of broker platforms at NAB, spoke about the major differences between the broker markets in Australia and the UK. 

According to Weston, Australia is one of the last markets in the world – along with some lenders in New Zealand – to pay trail commissions to mortgage brokers. Because of this, he said it is a reasonable assumption to say ASIC will be questioning this.

 “The other big, big difference is on remuneration – and that is something we should be concerned about with ASIC because regulators will speak to their international counterparts,” Weston told brokers.

“[In the UK] the upfront is not at 60 [basis points] that we have here, it’s 35-40 basis points and there is no trail.”

Weston – who admitted he is a big supporter of trail commission and has championed this model in the UK – said it is important now for the Australian mortgage broking industry to fight for it.

“We need to be very, very clear about what it is we do to justify trail,” he said.

He then told brokers that the UK experience should be used an argument on behalf of trail commission, not as a justification for abolishing them.

“This is the UK experience and you are free to use this as it is a good argument to ASIC,” he said. 

According to Weston, 90-95% of the UK mortgage market is made up of fixed rate home loans. However, when he compared the fixed rate products originated through the third party channel to the propriety channel, he found most of the broker-originated home loans were two-year fixed products whilst the propriety channel were five-year fixed products. 

This is because a lack of trail commissions incentivises churn.

“...[I]nterest rates in the UK – they’ve been at half a percent since 2009 – at some stage are going up. Borrowers are highly indebted as they are in Australia, so [rate] certainty would have been pretty important for customers. More should be taking a five-year fixed rate now than we are seeing from the broker market," Weston said.

“But the answer invariably was that because brokers were not getting paid enough commission they were putting a customer into a two-year fixed rate so they could churn them out in two years and get another upfront just so they could survive. Those are the sorts of unintended consequences that would happen if we remove trail.”

Weston also added that due to the UK’s remuneration structure, there is a much higher propensity for brokers to operate under a fee-for-service model.

But the FBAA’s Peter White told brokers at the National Tour that this is not a viable model for Australia, highlighting the importance of learning from the UK experience.

“In regards to fee-for-service, I don’t believe fee-for-service is a viable model. It has a place in the industry but it is certainly not the majority… 

“[I]t is most certainly not where the industry should be heading unless we do wind up going down the route of the UK market, but let’s not predestine that journey.”
 

COMMENTS

  • by MMR 15/06/2016 4:28:11 PM

    Welcome back Steve Weston!
    Why did we ever think we would be immune to this global movement away from trail? As I understand it there are 3 countries in the world that have trail - Australia, NZ and Canada - and the rate of trail paid in Australia far exceeds that in the other nations. If trail is scrapped in Australia brokers will need to evolve their business models - just like newspapers, book stores, tax accountants, financial planners, taxis and other rationalising industries. It will be a sad day IF trail goes; we need to fight for it but we also need a plan B.

  • by Broke Broker 15/06/2016 4:34:39 PM

    Why fix something if it's not broken? We know Banks Retail banking channel has remuneration issues with bonuses and incentives that have been abused including fraud with sales Statistics - having worked with a major for many years. Broker Churn was a concern in early days however is not a major concern now I believe. No doubt there is some element of fraud/crime as in any industry - that's why we have ASIC, APRA + ACCC etc to protect clients not dictate broker remuneration unless it was fundamentally corrupt. Clients overall get a great service and most often better rate and loan structure. Brokers mostly work hard, show dedication with after hours and weekend work, incur many expense in running a business, compliance etc and paying their fair share of Tax. Banks win with new clients and cross sales generated from brokers. It is a cheaper distribution model for Bank's So why would we need to follow international markets and perhaps an unfair model when our system is overall working efficiently and everyone wins ? ASIC and Government would need to prove to us, the Banks and the Public that there is a substantially better incentive system for us to continue to work in this Industry

  • by Tim H 16/06/2016 1:04:06 PM

    Trailing commissions are paid to brokers as an incentive for the broker to assist the client with future transactions on their loan accounts. They also in the case of NAB broker and a few other lenders encourage longevity with the particular lender due to the increasing trail the longer the loan is with the lender. These outcomes provide the following benefits to the client, lender and broker.
    - The broker maintains contact with the client and becomes their go to person for changes to their loan/s creating stability of a contact person who knows the clients financial background. Too often with lenders, staff changes create a level of concern for clients.
    - The changes including guidance on changing a bank account for direct debits, converting a loan from variable to fixed, partial discharge due to the sale of a property, assistance with dealing with the lender when financial hardship exists, small increases etc are better managed by the broker. As they deal with these every day this results in less worry and stress for the client and an easier processing procedure for the lender making the change more streamlined.
    - Lenders are more likely to work with the broker to retain a client. if a client is happy with their lender and the lenders' time managing the client is minimal then everyone is benefiting. Client gets better deals, lenders costs of managing the client are minimal and the broker earns an income for his time.
    - Finally broker churn which benefits the broker is reduced. If a brokers' only means of earning an income was upfronts then there would be a driving force to re-write loans regularly rather than work to get a better outcome from the borrowers' existing lender.

    The area of concern I do have with remunerations is the benefits aggregators get from lenders in the form of volume bonuses, special events/ trips for the aggregator heads and sponsorships etc of events in return for perceived bias for a particular lender. Over the years I have heard of situations where an aggregator may earn a bonus commission payment if a certain volume of loans is settled. The aggregator then pushes that particular lender to their brokers. We see regularly where a lender that sponsors a particular aggregator gets more airtime than one that doesn't offer sponsorship. Some may call this marketing but when the lender with the biggest marketing budget gets more airtime with an aggregator than a lender that has a better product one has to question who the aggregator is working for and what value they are adding.

    I am an "Industry Veteran" having commenced working in the mortgage industry in 1979. I have been broking for the past 19 years and have seen many changes come and go as well as many good and not so good people come and go. Australias' mortgage industry and mortgage broking in particular is not the damaged article some are saying. Sure there are people in this industry like in just about any you want to name that are bad eggs but in my time talking with many brokers it is plain that the vast majority want to do the right thing by the client and be paid a fair income for this. I trust ASIC come to this conclusion also in this review and leave the remuneration system as is and continue to work with lenders, aggregators, FBAA, MFAA and brokers to maintain a high standard for all.