PC defends censure of broker commission

by Manuelita Contreras26 Feb 2018

Productivity Commission chairman Peter Harris defended his agency’s criticism of broker commission in its report on competition in financial services, as he highlighted again the high cost of mortgage brokers.

Speaking at a Committee for the Economic Development of Australia event yesterday, Harris said more than $2.4bn is now paid annually for mortgage broker services.

The commission’s draft report released in early February says that based on ASIC’s findings, lenders pay brokers an upfront commission of $2,289 (0.62%) and a trail commission of $665 (0.18%) a year on an average new home loan of $369,000.

“Some in the broking industry want to know why there is suddenly attention being paid to commissions. The sum I just cited, as a large apparent addition to industry costs since the mid-90s, by itself suggests a public analysis of why it is so large might be in order.”

Harris said the amount becomes problematic when some parties suggest that consumers do not bear this burden as they do not pay commission costs.

“Which is a comment surely made for Twitter – since anyone with a slight amount of common sense knows that somewhere in any product purchase, it is only a customer or a shareholder who could be paying this charge, unless offsetting costs have been stripped out,” he said.

Harris also cast doubt on industry changes to broker remuneration structures. He said that despite announced changes to parts of commission payment schemes, broker commission remains far from aligned with consumer interests.

He zeroed in on trailing commissions – which he said are worth $1bn per annum – and questioned their relevance.

“The industry itself has said that trailing commissions are designed to reduce churn and manage customers on behalf of banks. Despite the hint to the contrary, we do actually understand quite well why it might be in a bank’s interest and a broker’s interest to jointly limit churn,” said Harris.

“But not the customer’s interest – who is most probably paying for the service.”

Harris acknowledged that, as mentioned in the commission's report, mortgage brokers provide "slightly better" rates for their consumers than going directly to a bank branch. He said, though, that this benefit of better rates has been declining since the global financial crisis.

He said the Productivity Commission preferred that banks imposed on brokers the duty of ensuring they act in consumers’ best interests, “perhaps via contract”.

“But we have no power to recommend what banks do for themselves, so we have instead a draft report that proposes regulation,” said Harris.

The commission is moving into the public hearing stage this week, and will submit its final report on 1 July.

 

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