Shadow treasurer says government has ‘got it wrong’ on trail

In the final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, commissioner Kenneth Hayne recommended that “changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers”.

Following the release of the report, the Coalition government’s official response initially suggested that it would seek to ban trail for new loans from 1 July 2020, but Treasurer Josh Frydenberg announced earlier this month that government would instead postpone any decision on removing trail until after a review of mortgage broker remuneration has been undertaken in three years’ time.

Meanwhile, the Labor Party’s response called for the removal of trail for new mortgages from 1 July 2020 and for a standardised upfront commission as a proportion of the loan amount. It suggested that commissions should be capped at 1.1 per cent “so that banks can’t offer brokers incentives to choose their products”.

‘A big tick to a big flick’

Speaking at the AFR Banking & Wealth Summit today, Mr Bowen slammed the government for its “backflip” on trail commissions, stating that they continued to “get it wrong” on the royal commission recommendations.

He said: “I’m normally not too partisan at these events, I normally steer away from political commentary – at least through much of my speech, but given we are at the business end of the term, with the federal election less than 50 days away, I’m sure you’ll appreciate some plain speaking.

“The choice is between an opposition prepared to make big calls, and get those calls right, versus a government that has got the big calls wrong.”

Mr Bowen outlined that commissioner Hayne was “very clear” in his observations, which he said included the observations that “the interest of customers was relegated to second place far too often; too often, consumers were being left in the dark about how products or services are acquired and delivered; and too often, financial services entities were breaking the law and not held to account for their actions”.

“Those actions that were revealed through the royal commission had given the entire sector a bad name,” Mr Bowen said.

“They needed, and need, to be dealt with. These are systemic failures in our financial services industry when it comes to providing community standards and expectations.”

Emphasising that the government had previously called the royal commission a “populist whinge”, “regrettable”, a “reckless distraction” and a “QC’s complaints desk”, Mr Bowen added: “They got the big call wrong. And they also continue to get it wrong now, in terms of the recommendations.

“That’s probably most clear in relation to mortgage brokers.”

Mr Bowen elaborated: “A few days after the royal commission was handed down, the government told us that they were implementing the royal commission recommendation on trail commissions and said the royal commission recommendation was getting a ‘big tick’. No nuance, no discussion, just simply that this would be implemented.

“Now the reasons given by the commissioner on this issue were clear: The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing, [he said].

“And these are not new issues. The Productivity Commission found trail commissions have the effect of aligning the broker’s interests with those of the lender, rather than those of the borrower. The case was clear.”

Mr Bowen therefore called the government’s change in stance on trail as “a backflip with triple pike”.

“Just weeks after giving a recommendation a big tick, it was given the big flick,” he said, noting that it took “just 35 days to backflip on a major reform of phasing out trailing commissions for mortgage brokers”.

However, the shadow treasurer said that “there was, and is, a strong case for thinking carefully about the royal commission recommendation and ensuring we protect competition in banking. That’s exactly what we did,” he said.

“We consulted with mortgage brokers, we consulted with banks and financial institutions – particularly the smaller ones.

“We came up with a different way of removing conflicted remuneration for mortgage brokers. We announced that we would have legislated a flat upfront commission rate to avoid mortgage brokers’ advice being conflicted by the rate of the commission offered,” he said.

Mr Bowen concluded: “It’s one thing to achieve the objectives of the royal commission recommendation in another way, as Labor has done; it’s another thing to completely abrogate any policy action, as the Treasurer has done.

“When we make big calls – and we’ve made quite a few of them – we stick to them, fight for them, and seek to mandate for them, which is what we’ll be doing, presumably, on the 11th of May [for the federal election].

“We will implement 75 recommendations of the royal commission in full. The government cannot say that and already we are seeing consumer groups being very concerned that the government is already walking away from other recommendations,” he said.

Broking industry continues engagement with ALP

While the shadow treasurer has reaffirmed the party’s stance on trail commissions, the broking industry continues its work in engaging and educating ALP members on the benefits of trail.

Indeed, just last week, a group of nearly 100 representatives from the mortgage industry met shadow assistant treasurer and federal member for Fenner, ACT, Dr Andrew Leigh, at the QT Hotel in Canberra for the Future of Mortgage Lending forum, organised by AFG in partnership with Connective and Mortgage Choice, in which the need for trail was hotly discussed.

Speaking to The Adviser about the event last week, AFG’s Mark Hewitt said that the purpose of the meeting was to have a town hall type discussion with economist-turned-politician Dr Leigh, and to outline how Labor’s plans to remove trail for new loans from next year could impact borrower outcomes.

“We wanted to get the point across to Dr Leigh about the unintended consequences of abolishing trail and the impacts that could have on the brokers’ ability to provide an ongoing service to their clients,” Mr Hewitt said. 

“Labor’s focus was very centred on talking about them being the first to move on commissions, but the sentiment in the room was definitely around the abolition of trail and why it was not a good idea. 

“What was particularly impressive to me was the care and concern that the brokers in the room had for their customers and also their concern about the unintended consequences of having their remuneration front-loaded in the way that Labor is proposing.” 

He continued: “We were talking about the impacts that the removal of trail might have on brokers’ [ability] to provide ongoing service to clients and also the fact that the model without trail doesn’t provide any incentive for an ongoing customer relationship.” 

Mr Hewitt told The Adviser that Dr Leigh “was very receptive to the messages in the room and was very impressive and engaging”. 

“It takes a fair bit of courage as well, as he was the only person in the room who thought that abolishing trail was a good idea, but he stood by the party line while still engaging and being respectful to the counter arguments,” Mr Hewitt said.

“We were very pleased with how it went because it’s a continuing conversation – and it was a two-way conversation, hearing both sides, which is what we wanted to achieve,” AFG’s general manager for broker and residential added.

[Related: PM defends policy call as pressure mounts on ALP]