Industry to defend trail commissions

“It is good that the forum has been put together because now trail commissions are under the spotlight,” Mr Haron said. “So again, we will take this process and use the forum to highlight the advantages of trail commissions in terms of improving customer outcomes and how we take that forward and educate the royal commission and Productivity Commission.”

Mr Haron’s comments come after Productivity Commission chairman Peter Harris reiterated this week some of the questions raised in the commission’s draft report into competition in the Australian financial system, which scrutinised broker remuneration and the purpose of trail commissions.

Chairman Harris said: “The industry itself has said that trailing commissions are designed to reduce churn and manage customers on behalf of banks.

“Despite the hint to the contrary, we do actually understand quite well why it might be in a bank’s interest and a broker’s interest to jointly limit churn.

“But not the customer’s interest, who (the data is surprisingly unavailable, as noted earlier) is most probably paying for the service.”

He continued: “Given the unhappy experience with misaligned incentives in wealth management, being able to substantiate the assurance that a broker is acting in the customer’s best interest would seem to be pretty desirable today.”

The CIF was created following the release of the Sedgwick report, which proposed significant reforms to the broking industry including changes to broker remuneration.

“As an industry, we were concerned about proposed changes to upfront commission,” Mr Haron said.

“We were worried that a few banks in particular would try and implement something quickly without consulting the industry and significantly cut upfront commissions.”

The forum was established by engaging MFAA, the FBAA, ABA, COBA, consumer group Choice and aggregators, lenders and brokers. In December last year, the CIF outlined six principles that aim to ensure better consumer outcomes and improved standards of conduct and culture while preserving competition in mortgage broking.

The first of these stated that the standard commission model will avoid financial incentives that encourage consumers to borrow more than they need or will use — for example, by basing commissions on facility drawdown net of offset.

The CIF’s response is now in the hands of ASIC and Treasury.

The Adviser understands that the government will not be making any comment on it until the royal commission’s report is complete.

[Related: Broker commissions ‘far aligned’ from consumer interests: PC]