Mortgage brokers rejoice as coalition backflips on trail commission ban

After testing the waters over the last month, the government has joined the federal opposition in backflipping on controversial mortgage broker reforms recommended by the banking royal commission.

In what can only be considered a win for the politically influential mortgage broking industry after a month of sustained lobbying, Treasurer Josh Frydenberg said the government won’t ban trail commissions on new loans and will instead review their operation in 2022.

Kenneth Hayne’s banking royal commission wanted both trail and upfront commissions to mortgage brokers to be banned and industry revenue moved to a user-pays model to tackle perverse incentives.

Hayne was worried the current model, where banks pay brokers, fostered dishonest conduct in the broking industry by aligning broker incentives against customers.

But the proposals sent the industry into an uproar, with some small-business owners claiming the changes could spell disaster for their livelihoods.

Frydenberg said on Tuesday mortgage brokers are “critically important” for competition in the mortgage market, accounting for almost 60% of all residential home loans.

“The Government wants to see more mortgage brokers — not less,” he said in a statement circulated yesterday afternoon.

The government’s review will be conducted by the ACCC and the Council of Financial Regulators and will also consider whether upfront commissions should also be continued.

Prime Minister Scott Morrison had previously pledged support for the mortgage broking industry, but only a month ago had doubled down on an intention to ban trailing commissions.

“The royal commission has recommended some changes that will need to be absorbed over time, those businesses can absorb those over time if they’re done in consultation,” he said in February.

Labor has also clarified its position on mortgage brokers in the wake of the royal commission final report, and despite saying originally it would implement all the recommendations, will not outright ban upfront commissions if elected.

Instead, Labor would cap upfront commissions to 1.1% of loan value, while still pursuing a ban to trail commissions.

“Mortgage brokers were not at the top of the hit list when the banking royal commission was called for,” Shorten told media on Tuesday.

Shadow Treasurer Chris Bowen described the government’s backflip as “humiliating” on Tuesday, repeating Treasurer Frydenberg’s assessment of Labor’s earlier backflip.

Brokers rejoice

The back down is a victory for the broking industry, which has been lobbying intensely against the reforms since before the royal commission final report was even released.

Consumer groups like CHOICE, the Consumer Action Law Centre and Financial Counselling Australia last month boycotted an industry forum discussing potential changes to the industry, complaining broker lobbyists were being “disingenuous”.

The groups maintain the industry hasn’t served the best interests of clients for years, and still want government and the opposition to implement Hayne’s recommendations.

ASIC findings on mortgage broker loans indicate customers borrow more and pay down debt slower when brokers are involved, but get the same interest rate as those who go direct.

Brokers and the government are concerned though that changes to broker remuneration could disrupt competition in the market, allowing the banks to rake in market share and potentially offer less favourable terms to consumers in the medium term.

Brokers SmartCompany spoke to about the backflips said they were encouraged, but urged the opposition to match the coalition’s back down on trailing commissions.

Sydney-based broker Rob McFadden, who authored an online petition against the reforms which drew over 82,000 signatures, said he has a little bit more certainty about his future now.

“Scrapping trail would have meant a whole change in focus around the ‘client for life’ relationship,” he tells SmartCompany.

“There is still nothing to say that the review after three years may recommend a different outcome, however, at least we can continue to put forward our case as to why the current system works so well and provides for far better customer outcomes.”

Melbourne-based broker Edwena Dixon, who also campaigned against the proposed reforms, says it’s “good to see someone is listening”.

“There has been a lot of pushback against the Hayne report proposals, not just from brokers but also from our customers, and it’s great to see that the Liberal Party have taken the time to understand the issues and change their position,” Dixon tells SmartCompany.