The government’s ban on trail commissions as a result of Commissioner Hayne’s final report will have huge consequences for competition – and the future of the broking industry.
Adopting Commissioner Hayne’s 76 recommendations, the Treasurer Josh Frydenberg confirmed that trail will be banned from 1 July 2020.
The decision has angered many, especially with regards to Hayne’s failure to address the pay and bonus structures of bank executives who oversaw the very misconduct the royal commission was established to investigate.
Speaking to Australian Broker, FBAA executive director, Peter White said the decision has “handed power back to the banks”.
“I am very very disappointed by the lack of due diligence and understanding of the broker market by the royal commission,” White said, raising questions around how the ban will be implemented.
“If you get rid of trail does it mean upfront will go up to compensate for the losses that will be made under the commercial agreements that are in place? And, if upfronts go up does that mean that to compensate for that, banks will increase interest rates? It will always be the consumer who pays.
“Brokers are paid by the lender because it is a supply side cost – it’s a cost of distribution,” White continued.
In a press conference on Monday afternoon, during which the government’s full response to Hayne’s report was outlined, Frydenberg said a review of the ban would be conducted in three years’ time.
White added, “Say in three years they go for a full fee for service model – which is what Hayne wanted – the conflict of interest then becomes you are getting paid by the borrower so you do things in their interest, not the lender’s, credit policy’s or otherwise. You now have conflict that puts you in line with the borrower instead of being in the balanced position it is in now.
“You don’t have to change the remuneration model, it doesn’t remove conflict. In a fee for service model, all it does is increase the cost of getting a home loan and the banks just make more money. All this has done is hand power to the banks and that is not a happy day,” he said.
CBA was the first to claim trail causes conflicted interests in its February 2017 submission to the Sedgwick Review. Hayne’s report quotes the bank as saying “the use of loan size linked with upfront and trail commissions for third-parties, can potentially lead to poor customer outcomes". ASIC echoed this point the following month in its report.
Hayne’s report read, “The evidence from CBA showed that the size of commissions has an effect on which lender the broker recommends to the borrower”.
Trail Homes head and founder Nick Young said, “This will effectively force people to re-engage directly with those banks that have large and extensive branch networks.”
Predicting a sharp contraction in the overall number of brokers, Young told Australian Broker, “It will be a rollback to where we were 10 to 15 years ago and that is not in the interests of the consumer. I’m sure the outcome of this will be that banks offer to discount the fee if you deal with them directly.”
He continued, “A ban on trail is not backed up with solid evidence that [trail] has been a primary driver of misconduct and, by the way, we are still scratching to find the misconduct that has occurred in the mortgage broking industry.
“This is not like the financial planning industry where it was found organisations were systemically exploiting people. There has been no evidence of that put forward.”
When asked to comment on the changes during a press conference on Monday, ABA CEO Anna Bligh said the report contains “some very radical suggestions that need careful thinking”.