Brokers caution of dire consequences of banning trail

by Julia Corderoy17 Jun 2016
Banning trail commissions would have dire consequences on the mortgage broking industry, brokers have proclaimed, with some admitting they would consider leaving the sector.

Kim Hall, director of Smart & Simple Mortgage and Finance Consulting on NSW’s Central Coast, who attended the FBAA National Tour yesterday, told Australian Broker she is concerned by Steve Weston’s caution that trail commissions could be banned under ASIC’s remuneration review. Especially because she doesn’t believe upfront commission will be adjusted as a result. 

“At present, broker remuneration is a mix of upfront commission and trail commission. Abolishing trail commission would essentially be a cut to total remuneration, as I don’t believe there is any proposal on the table to increase upfront commissions to compensate for the amount of trail that would be lost if it were banned,” Hall said.

“I think it’s fair to say that an overall cut to remuneration would be a concern for anyone regardless of which industry they’re in.”

Mardee Thomas, mortgage broker at 1st Street Home Loans in Sydney said axing trail commissions would have harmful effects on consumer outcomes.

“I think the biggest issue will be that it will promote mortgage churning, whereby brokers will move a client from one lender to another for the purpose of obtaining additional remuneration, with little-to-no regard for what is in the client’s best interests,” she told Australian Broker.

But because of this, however, Thomas said she doesn’t believe ASIC will ban trail.

According to Hall, there is a false perception that trail commission is income for nothing.

“Unfortunately there is a perception that trail is money for nothing, it’s not, it’s deferred remuneration paid on a monthly basis for continuing to look after that client on an ongoing basis.  

“Good brokers invest a lot into the ongoing client relationship, they are often at the client’s beck and call well after the loan settles, and they also invest a lot into their business to continually improve the client experience.”

Hall told Australian Broker she would even consider leaving the industry if there were any drastic changes recommended by the review.

“Depending on the actual outcome of the review, exiting is a possibility if the numbers no longer stack up. But that’s the same as any industry; people do not stay in business if it’s no longer viable,” she said.

Thomas told Australian Broker that she would consider adopting a fee-for-service model to remain in the industry.

“I definitely wouldn’t consider leaving the industry as I really enjoy what I do and work with a wonderful group of people, though I believe we would then have to implement a fee-for-service for our clients’ requirements regarding ongoing support.”


  • by Oscar Hvala 17/06/2016 9:08:34 AM

    If banks are not charging fee for service, I believe a broker would not have a chance of getting any business. Many brokers have ticket on themselves if they believe their clients will come to them and pay a few thousand dollars when they could go to the bank and have the same thing for no service fee at all. The profession would become an "elitist" service and the average person would simply go the branch or go on line these days. Where is the competition then? Back to the banks. Adjustment to upfront would be needed.

  • by 17/06/2016 9:19:16 AM

    I understand that all mortgage brokers position will be against the banning of trail income, after all it's a threat to our livelihood.
    However if our reason for retaining trailing commissions is based on the argument that it is a form of deferred revenue or is a fee for the ongoing service, my view is that argument will ultimately fail because commission is based on the size of the loan.

    Up front commission and trailing commission is not a fee for service, it is an incentive for mortgage brokers to introduce profitable customers to a bank who then shares a portion of it's profits with the broker. Trailing income is only paid to reduce the appetite of mortgage brokers to switch their clients. The industry needs to recognise this and become more transparent.

    A more transparent model would be that lenders should provide fixed interest rate discounts to the clients of mortgage brokers to recognise the benefits we bring to them and in turn mortgage brokers should enter into a fee arrangement with their client.

  • by Paul 17/06/2016 9:47:58 AM

    Interesting point above, I also have an insurance business and the insurance company has just changed the commission model, from $ value on the property to a flat fee per policy.

    Their argument is it takes the same time to write an insurance policy on a $200,000 home as it does on a $800,000 home. Imagine if lending commission went that way. All the city brokers would be jumping up and down as their commission would reduce and all the regional brokers would be happy as their commissions would increase.

    Then it's a fair field, or is it? It really does take the same time to write a $200k loan as it is a $800k loan, just dealing with different incomes. This is correct for standard residential. Throw in trusts or commercial lending and the complexity changes.

    Is this an over simplistic view?