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.”