New legislation introduced into parliament this month governing commissions in the life insurance advice industry is unlikely to have a major impact on mortgage broker commissions, according to an industry veteran, but it is likely to have some effect on the upcoming remuneration review.
This month assistant treasurer and minister for small business Kelly O’Dwyer introduced legislation into parliament resulting in important changes to way commission is structured regarding life insurance advice.
The changes, which will come into effect 1 July 2016, include a three-pronged approach governing upfront commission, trail commission and clawbacks.
Upfront commissions will be scaled down to a maximum of 60% as a part of a three-year phase-down from 1 July 2018 and trail commissions will be capped at 20%.
Further, a two year commission clawback period will be introduced, which will clawback 100% of a commission in the first year and 60% of a commission in the second year, should a policy lapse.
Michael Russell, ex-Mortgage Choice chief executive and managing director of MoneyQuest, says the mortgage broking sector “need not be alarmed” by this new legislation ahead of its own ASIC remuneration review.
“We, the mortgage broking industry, need to understand that the environment that contributed to these changes does not exist today in our industry,” Russell told Australian Broker
“The changes introduced last week have not come as any shock to the financial planning industry, which has permitted some planning groups to operate on an upfront commission model of up to 120 points upfront and a 10 point trail. Combine this with a one year clawback and you can’t possibly think you have a commission model that incentivises customer best interests.”
Russell says the new structure is a “significant cut” for life insurance advisers but it should have been implemented years ago.
“The three-year phase-down period to a maximum hybrid model of 60/20 is certainly a significant cut in the upfront commission, but does incentivise planners to keep their clients longer by effectively doubling the trail commission.
“Simply put, a 120/10 upfront model has always been a red rag to the regulators and should have been re-engineered to align to customer best interests years ago.”
When considering how these changes will impact the mortgage broking sector and its upcoming remuneration review, Russell told Australian Broker
that three factors need to be considered.
“Firstly, what would now be regarded as unconscionable commissions pre GFC, have since been removed and in the main replaced with an upfront commission range of circa 50-65 points.
“Secondly, present trail commissions remain in a range that is certainly no greater than what was legislated last week for financial planners.
“Thirdly, in recent times and particularly since the introduction of NCCP, mortgage brokers have clearly demonstrated their willingness to do whatever is required to continue to improve our customer service experience, both at the time of origination and throughout the loan term.
“Consequently the combination of upfront and trail commission continues to incentivise the desired behaviours.”
However, Russell says the decision affecting life insurance advice may bring “structural issues” to light.
“So in short, while I do not believe there is anything manifestly objectionable with the quantum of mortgage broker commissions, there may be some structural issues more around standardisation that might come to the fore,” he told Australian Broker