Philip Coorey, John Kehoe & Natasha Gillezeau| Australian Financial Review| 12 March 2019
The federal government has backflipped on a key recommendation of the banking royal commission and will no longer ban trail commissions for mortgage brokers from 2020, as it promised to do last month.
Instead, it will hold a review into whether trail commissions should be kept from 2020 onwards. The review will be conducted by the Australian Competition and Consumer Commission and the Council on Federal Financial Relations, which comprises the federal and state treasurers.
Treasurer Josh Frydenberg announced the backdown after intense lobbying by the mortgage broker industry and the smaller lenders.
“After consultation with the mortgage broking sector as well as small lenders, the government has decided that the trailing commission issue will now be the subject of the review by the ACCC and the Council on Federal Financial Relations in three years’ time,” Mr Frydenberg said.
“So the abolition of trail commissions from July 2020 won’t proceed as first announced.”
Mr Frydenberg claimed the backflip was driven by concerns about the “impact on competition in the mortgage lending market”.
Labor, like the Coalition, agreed to abolish trail commissions. And like the Coalition, it rejected Commissioner Kenneth Hayne’s recommendation that the borrower, not the lender, pay the upfront fee.
It promised to maintain the system in which the lender pays the upfront fee but double it to 1.1 per cent to make up for the loss of trail commissions over the life of the loan. The upfront fee will only apply to the draw down component of the loan.
The Coalition will continue with the current upfront fee system but it will be only a percentage of the draw down component of the loan.
The decision to no longer abolish trail commissions establishes a new point of difference with Labor.
Shadow treasurer Chris Bowen reminded Mr Frydenberg of a tweet he sent the night before Labor backed away from its original plans to accept the Hayne recommendation on mortgage brokers and instead announce a new, increased upfront fee.
“Well, this aged well,” Mr Bowen said of the tweet in which Mr Frydenberg said Labor’s announcement would be “humiliating”.
The small lenders argued they would be disadvantaged by a higher upfront fee as proposed by Labor because the bigger banks could afford it more than them.
“Small lenders and mortgage brokers are absolutely critical part of competition in that market,” Mr Frydenberg said.
“There are 17,000 mortgage brokers employing 26,000 people, and they write over half of the residential backed mortgages. So they’re a very critical part of the sector.
“Labor’s decision to have a higher upfront fee will cause problems for competition in the sector. Because not all lenders have the ability to, with a strong balance sheet, to provide higher up-front fees.”
The back down is at odds with Reserve Bank of Australia governor Philip Lowe said last month it made “a lot of sense” to end trail commissions for mortgage brokers, as well as the government’s plan to make sure brokers have an obligation to act in the best interests of clients and subjecting them to the same rules as financial advisers.
Dr Lowe did back the government’s caution against the Hayne royal commission’s separate call for borrowers – not lenders – to pay the broker an upfront fee of about $3000.
“I think it’s worth taking time to get that right, because many of the smaller lenders in the country rely very heavily on brokers—for some of them, 80 or 90 per cent of their loans are generated through the broker.
“So, if the broker channel wasn’t working effectively, then the smaller lenders would have trouble and there would be less competition in the market,” Dr Lowe told a House of Representatives economics committee on February 22.
The industry welcomed the backflip for which it had lobbied and urged Labor to follow suit.
Mike Felton, chief executive of the Mortgage and Finance Association of Australia, said “this is a great outcome” which acknowledged “the case for the removal trail commissions has not been made, nor has it been demonstrated that existing trail arrangements lead to poor customer outcomes”
“Treasury’s submission to the Royal Commission indicated that the removal of trail (commissions) would actually increase incentives for brokers to seek transactions rather than customer satisfaction in the long term.”
Australian Finance Group chief executive, David Bailey, the nation’s largest mortgage broker aggregator, also welcomed the decision and called on the federal Labor opposition to “adopt this sensible policy”.
Meanwhile, Opposition financial services spokeswoman Clare O’Neil said Labor was committed to commissioner Hayne’s recommendation of “stapling” a single default superannuation account to workers as they move jobs.
“We’re committed to stapling. Exactly what that looks like, I’m not sure. But certainly, we do need to abide by his recommendation and move away from the incredibly problematic issue with superannuation today, which is the issue of this multiplicity of accounts,” Ms O’Neil said to the Committee for Sydney on Tuesday.
“150,000 people in Australia have six or more superannuation accounts. On all those accounts they’re paying fees, they’re paying insurance, it’s diabolical.”
She said “stapling” was not “diametrically opposed” to the industry’s alternative push for a “balance rollover” scheme.
A balance rollover approach, which the Royal Commission and the Productivity Commission did not endorse, would involve the balance of pre-existing super accounts being automatically transferred into a person’s new default account rather than the initial account itself following the worker.
The Productivity Commission report found the automatic rollover model would cost $45 million a year in administration compliance for about 500,00 rollovers.
Xavier O’Halloran, head of advocacy at the Superannuation Consumers’ Centre at CHOICE, said balance rollover was not consistent with “stapling” accounts.
“Balance rollover adds a whole bunch of extra costs into the system and seems really inappropriate, and designed to satisfy industry and not consumer needs,” he said.
“Under the PC and Royal Commission model your fund follows you and that is more efficient.”