Group calls for scrutiny of trail commissions

by Manuelita Contreras09 Feb 2018
Consumer advocacy group Choice has called on the royal banking commission to look into the impact of broker commissions on consumer outcomes, urging for special scrutiny of trail commissions.

In its public submission, Choice said the commission should use its powers to compel banks and lenders to provide evidence behind high fees and “harmful practices”, including what service mortgage customers receive when brokers are paid commissions.

The submission comes a week before the royal commission holds its initial public hearing on Monday, 12 February.

The group’s CEO, Alan Kirkland, said the evidence will be crucial in making the case to end what he calls “the cycle of misconduct, apologies and delay”.

“The banks have spent the summer holidays explaining away past misconduct and promising to do better next time. It’s a story we’ve heard before, misconduct, followed by repentance, followed by more misconduct,” said Kirkland.

Choice expressed doubt consumers are getting any service from brokers who receive trail commissions on loans they arrange until the consumer switches products.

It prodded the commission to examine the impact of commissions – particularly trail commissions – on the quality of consumer outcomes. It said trail commission payments offer no clear benefit to consumers and instead benefit brokers, aggregators and lenders. 

“For consumers, there is some implication that trail accounts for service delivered by the broker over the life of a loan. It is incredibly unclear what service is being delivered – any assessment about whether other options are better suited to a client during the life of a loan could be covered through one-off fees based on time actually spent assisting the client rather than the opaque high-costs of trail commissions,” it said.

Trail commissions are most perverse in the business of buying and selling of mortgage loan books, said the group. Besides the lack of benefit, consumers also face the possibility of additional service being removed when these sales happen. 

Choice also aired its concern that some consumers do not get the service they expect when seeing a mortgage broker.

“Advertisements for brokers claim that they will find customers the right loan, provide tailored advice or get a great loan for the client. However, their actual obligation to clients is quite low – brokers have to help arrange a ‘not unsuitable’ loan.”

This echoes what the Productivity Commission had said in its draft report on competition in financial services released on 7 February. The commission pointed out that under the NCCP, brokers are only required not to suggest unsuitable loans to consumers, rather than act in their best interests.

In response, the MFAA said that the Combined Industry Forum has proposed that the industry go above and beyond what is required by the current legislation.

“We have defined a ‘Good Customer Outcome’ as ‘the customer has obtained a loan that is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan’,” said MFAA CEO Mike Felton.

“This provides the objective of all the CIF’s proposed reforms, and the benchmark which the industry will use to assess ourselves against in the future.”

Related stories:
Brokers cry foul over scathing report
CIF to update commission model by 2018
Commission should recognise ASIC review: AFG


  • by Fed up Broker 9/02/2018 9:11:08 AM

    It allows brokers and aggregators to stay in business and continue to be their for their clients constantly sorting out problems the banks cause and also getting better deals and correctly structured loans for consumers.
    Go attack someone else for a change CHOICE!
    Yoir a joke still storing this pot!!!

  • by Country Plumbroker 9/02/2018 9:17:32 AM

    Oh Dear here we go again , Choice are just two faced , will they in their public submission reveal their failed efforts to launch their campaign that was promoting "compare and refinance your mortgage" !!! I seem to recall that was going to use a so called broker group that appeared to be unlicensed and did they reveal they would receive a fee ??? No they will not. When will people realise that Choice are not a public advocacy body but a business who want to sell subscriptions for a fee. If they were a public advocate for consumers they would never promote the types of so called service like refinance your mortgage they have in the past !!

    Their assertion that there is something wrong with buying and selling trail books that means a possible poor consumer outcome.They do not seem realise that the buyerof that book needs to really look after the new clients and ensure that they do receive good service and their loans continue to be suitable, its a return on investment . If clients were unsatisfied with the outcomes they received , complaints about brokers would be up to the likes of COSL , they are actually down !! ,Wwhy do I get repeat business from my clients and referrals from them on a weekly basis ?? They do not appear to be dissatisfied.

    The contention that brokers do not try and get the best outcome for the client fails to recognise the interview and fact find that we have to do, looks at the needs of the client and their financial position, then we need to recommend a number of loans that will suit the clients needs , do they get that from a single lender NO . Really Choice's lack of understanding is poor and very concerning .

  • by Awesome Albert 9/02/2018 9:26:44 AM

    Do Choice do any research or think about the knock on affect of these statements?
    We had a time in the industry when some lenders offered just trail, but who trusted the lenders to continue paying it?
    We had lenders who paid just upfront, but then there was no disincentive to churning the loan book.
    The current upfront and trail is a great balance of the two. It encourages brokers to look after clients long term with the trail and provides cash flow and security to new industry entrants.
    How about addressing the elephant in the room, the last thing Choice promoted, the banning of exit fees which where 1% or less for the first 2~3 years but once banned saw the interest differential between the cash rate and home loan rate offered to borrowers increase by more than 0.5% for all borrower, for the life of the loan. All while broker commissions were reduced.
    How did this benefit borrowers?
    Choice, you were pushing for the banning exit fees because it would make it easier to swap lenders and increase competition but in fact the exact opposite has happened. Please explain Choice?