The proposal to ban trail commissions for mortgage brokers, which was made in the final report of the banking royal commission, did not sit well with finance and investment expert Noel Whittaker. He said that, among other consequences, this may enable banks to take advantage of customers.
Whittaker said that in the early days of the financial services industry, the main remuneration was by an upfront commission. However, the business had no recurring income and was dependent on securing new customers to keep it going. As a result, the problem of how to charge a person who wanted ongoing advice arose.
Basing the business solely on upfront commissions was deemed unsustainable and upfront commissions were stopped to make way for the trail fee. This allowed businesses to have a basic income while providing ongoing service to their clients without the need to issue a new invoice.
There is a general ignorance of the purpose of trail fees and how they work, according to Whittaker.
“It’s a quirk of human nature that most people have no problem with expenses that are deducted but hate to receive a separate invoice. The classic case is the group certificate and personal income tax. Nobody seems to worry when $20,000 is deducted in tax, but they will scream if they are asked to write a cheque for $500 to the tax man,” he said.
Asking applicants to pay an upfront fee may discourage them from getting a mortgage broker. Whittaker himself was once overwhelmed by the available options he found when he was looking to borrow for a family home. In addition, the criteria for loan eligibility were inconsistent and confusing, and the loan rate differed depending on the lender. In choosing the most suitable lender, he also often had to consider whether he could meet certain eligibility criteria.
In the end, he got a mortgage broker since the entire process was too difficult to do on his own.
“The mortgage broker told me that on a $400,000 loan, he would receive an upfront commission of 0.6% or $2,400 paid for by the bank. It could be clawed back if the loan was paid out within three years from establishment. The lender would pay the broker a trail fee of 0.15%, or $600 a year, as compensation for providing advice to the borrower as needed. This could include advice about moving to a fixed rate, managing a change of employment or a move interstate by the borrower, negotiating a better rate with the existing lender instead of changing banks, and checking the best way to finance a change in residence or the acquisition of an investment property,” Whittaker said.
With the banking royal commission recommending that the system be scrapped, the possibility of putting customers at a disadvantage increases, Whittaker said.
In the newly proposed setup, applicants who wish to use a mortgage broker will have to pay an upfront fee, and if they are unable to pay, it could be added to the loan.
“Well, you know what’s going to happen. No young couple looking for a loan will be prepared to fork out over $2,000 to a mortgage broker to research the market and find out the best deal. Instead, they will go online to look for what appears to be the best deal and jump in,” Whittaker said.
Without a mortgage broker as an intercessor to keep lenders honest, the banks will likely introduce more complex products and additional costs, Whittaker said.
“When the royal commission was taking place, the values of bank shares were slashed. It speaks volumes that as soon as the market opened after the release of the final report, bank shares were up around 5%. I rest my case,” he said.
Whittaker’s arguments seemed to be a reflection of many brokers’ sentiments, as a petition to save the mortgage broking industry was started on change.org. As of this writing, close to 40,000 people have already signed the petition.
People are appealing to Prime Minister Scott Morrison and Treasurer Josh Frydenberg to ignore the recommendation made by the commission to change mortgage broker remuneration. They also are asking the opposition leader and shadow treasurer to pledge that they will ignore the recommendation, should they win government.
“We completely reject the assertion by Commissioner Hayne and Matt Comyn, CBA CEO, that trailing commission is ‘money for nothing,’” the petition said.