Trail commissions "should be banned" but upfront commissions will survive, and may even rise if the Productivity Commission's model to end an age old debate over fees in mortgage broking wins out.
Showing more drive than ASIC last year to call time on the pricing legacy from the early days of mortgage broking in the 1990s, the commission is calling for change along the supply chain
In its final report, the PC centres its analysis on "conflicts in broker remuneration."
With little patience for defenders of the status quo, the report surveys "a range of views as to why trail commissions are paid" and their effect on broker behaviour.
"These claimed purposes included providing an incentive for brokers to achieve good outcomes for their customers; influencing the level of refinancing and reduce 'churn'; aligning the interests of the broker with those of the lender; and remunerating brokers for providing ongoing services to clients." Ho hum.
"We remain unconvinced that trail commissions serve any such purposes," the report insists.
"The evidence is not there, certainly not from the banks that pay the commissions, nor from the brokers' associations.
"It is most likely that a traditional form of remuneration common in the 1990s, when brokers emerged as a competitive force, has simply persisted long after it has been found detrimental to consumers in other financial product markets."
Exasperated at the state of play, the report said of "industry-led initiatives to reform broker remuneration structures, it is apparent that little change is occurring and the principal commission structures continue to create conflicting incentives for brokers.
"At its simplest, brokers have a strong incentive — regardless of what may be in their
customer's best interest — to give preference in their loan recommendations to lenders that
pay higher commissions. This may be uncommon, but there is no obligation for transparency
of the payment to prove it."?
The commission's panel, chaired by Peter Harris, argue brokers and aggregators will adapt.
"To the extent that brokers' business models rely on them maintaining ongoing (if infrequent)
interaction with customers, they are likely to provide on-going advice irrespective of
commissions.
"We see no case for paying for something (that is, through trail commissions)
that is going to happen anyway."
The financial advice fee-for-service model receives no encouragement.
"Fixed fees paid by customers rather than commission structures have been proposed, and
would eliminate conflicts, but the cost to competition would be high," the commission said.
"Consumers would desert brokers, and smaller lenders would suffer much more than larger lenders, if customers were required to pay for broker advice.
"But change is required — to the role of the lender in being the paymaster — to reduce
the scope for damage from conflicted advice.
"Thus, while we propose that up-front commissions remain paid by lenders, we consider that
going forward, trail commissions must be abolished — as they have already been in other
parts of the financial system."
The report "accept that up-front commissions may rise as a consequence of such action. Broking
businesses would need to remain commercially viable."
Industry agreement to abolish volume-based commissions "must be implemented by all lenders without further delay."