Russell defends trail, slams calls for ‘fees for service’

In his address to the Productivity Commission (PC) on Tuesday, 6 March, the MoneyQuest MD and former Mortgage Choice chief Michael Russell joined several other industry heads in defending the industry’s receipt of trail commission.

“Mortgage brokers have been the whipping boys for a long time, with respect to trail commission and misinformation about what we do for the trail commission,” Mr Russell said.

“The fact of the matter is that we work very hard with our clients for the life of the loan for that trail commission.”

In its draft report, the PC alleged that the payment of trail commission “creates perverse incentives for mortgage brokers by rewarding them for keeping customers in their existing loan”, thus preventing switching.

As part of its inquiry into competition in the banking sector, the PC issued an information request, asking if there was a “rationale for the structure behind mortgage broker commissions”.

In response to the PC’s claims, Mr Russell stated that the payment of trail commission was made under the premise that brokers remain the “first port of call” for clients.

“Initially, when trail commissions were part of the outset of mortgage broking, we had very strong leaders within the lender third-party business that made it very clear from the outset that we are paid trail commission to be the first port of call for any client enquiries during the life of their mortgage,” the MD continued.

Mr Russell noted that brokers have been expected to refinance loans for clients on behalf of lenders, which sometimes requires a full application, claiming that many lenders don’t have the capacity to “manage mortgage holder expectations”.

“[Professional] mortgage brokers [with] successful businesses see that management of the client throughout that trail commission duration as why they get paid their trail commission.

“[Lenders] don’t have any infrastructures to manage mortgage holder expectations throughout the life of the loan.

“The industry took the guidance or the obligations very seriously when we were paid trail commission. We’ve invested sizable amounts into our customer relationship management programs, [and] we’ve invested a lot in the training of our mortgage brokers and what they’ve needed to do, when they do an annual review.”

The MoneyQuest boss claimed that most brokers would be supportive of measures that would require the continued servicing of clients over the life of a loan to be weighted up against key performance indicators (KPI).

“That would be supported by the vast majority of professional mortgage brokers who would not have a problem in that because they’re discharging those obligations,” Mr Russell said.

“Mortgage brokers would not have a problem working the KPIs and justifying the commissions we earn.”

Fees for service is “offensive” and “anti-competitive”

The PC has also explored the possibility of introducing a fees-for-service model in the broking industry, similar to that charged by financial planners.

However, Mr Russell has echoed the warning issued by Connective director Mark Haron, who warned that such a model would be “anti-competitive” by reducing choice for consumers.

“The mere notion of providing a fee impost or a tax if you use a broker, I find offensive,” Mr Russell said.

"It’s discriminatory for a lot of people who need mortgage brokers to assist them.

“I think it’s anti-competitive, and I don’t see any reason why anybody would suggest we impose this impost upon individuals.

“Is the outcome of directing more consumers that can’t afford the fees for service back to first party [in] any way in the consumer’s best interest? Is that outcome, in any way, a positive thing to be promoting competition in the lender market?”

Mr Russell made the comments at the final day of public hearings for the Productivity Commission’s inquiry into competition in the Australian financial system.

The commission has been consulting with industry for the past few weeks and will be reportedly utilising the evidence given in the hearings to help form the final report to government, which will be issued in July 2018.

Those wishing to make a submission to the PC and provide feedback to its draft report are being asked to do so before 20 March 2018. 

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