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Commissioner Kenneth Hayne’s recommendation to overhaul the broker remuneration model missed the mark, according to the chair of the House of Representatives’ standing committee on economics.
On Monday (29 June), the House of Representatives standing committee on economics announced that it would scrutinise the mortgage broking sector in a new hearing, which forms part of its ongoing review of Australia’s financial institutions.
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The hearing commenced this morning (30 June), with the Mortgage & Finance Association of Australia (MFAA) and the Finance Brokers Association of Australia (FBAA) fronting the committee to discuss recent regulatory developments in the broking industry.
Tim Wilson, Liberal MP and chair of the committee, opened the questioning by revealing that in his view, recommendations handed down by commissioner Kenneth Hayne in the final report of the banking royal commission to scrap commission-based remuneration in the broking industry were off the mark.
Before enquiring about the industry’s position on commissions, Mr Wilson said: “I actually think Hayne got it wrong on mortgage brokers and trailing commissions.”
In response, MFAA CEO Mike Felton pointed to findings from previous inquiries conducted by the Australian Securities and Investments Commission (ASIC) and Treasury, noting the utility of trail commissions as a “controlling mechanism”, which has “stood the industry in good stead” and “improved customer outcomes”.
“ASIC reviewed our industry in great detail and did not recommend that trail commission be banned,” he said.
“They did not find it directly leading to poor outcomes and, in fact, they went as far as to say that trail incentivises higher quality loans.
“A similar sentiment was expressed by Treasury, saying that conflicts in the absence of trail and clawback would be worsened, again highlighting the control mechanism that exists within trail.”
Citing data collected by Deloitte Access Economics and CoreLogic, Mr Felton added that with trail comprising of approximately 50 per cent of a mortgage broker's income, which averages around $86,500 per annum before tax, a ban could devastate the industry.
“Removing 50 per cent of that income in the abolition of trail – if it was not topped up into upfront – would not be a good outcome for our industry and would challenge the viability of the important mortgage broking industry that drives competition and access to credit,” he said.
Representing the FBAA, David Carson, regulatory compliance specialist at Compliance One, echoed Mr Felton’s sentiment.
“The recommendations relating to remuneration that came out of the royal commission were some of the most surprising,” he said.
“They certainly have significant potential ramifications for the industry, and as Mike Felton has said, prior reviews of remuneration structures had not demonstrated any significant need to overhaul the remuneration structures of mortgage brokers.”
Mr Carson added: “I’d agree with the chair on this also, we think the royal commission recommendations were not on point.”
The federal government opted not to implement the banking royal commission’s proposed ban on commission-based remuneration, instead announcing that Treasury would lead a review into broker remuneration in 2022.
The standing committee on economics’ hearing is yet to conclude, with the Australian Finance Group to appear before the committee later this afternoon.
