Major banks may well be the unintended beneficiaries of any move to ban trailing commissions for mortgage products, AFG has warned.
Speaking after the release of the Productivity Commission’s final report into competition in the Australian Financial System, AFG CEO David Bailey cautioned that any move to ban trailing commissions for mortgage brokers would have the impact of consolidating the lending base of the banks, cutting competition and driving up prices.
“This is ironic given the tone of the majority of the final report. Consumers have been voting with their feet in greater numbers for over 20 years and increasingly use brokers for better service and less costly, better-suited home loans,” Mr Bailey said.
“Mortgage brokers are encouraged through trailing commission to stay with customers for the life of their loan, to review products and add value. It is in the business interest of brokers to work for their clients through the years to help them continue to gain better finance outcomes as circumstances change.
“Banning the incentive to work with customers for longer durations would have a detrimental impact on the very services that brokers help provide – greater competition.
Mr Bailey also noted that the Productivity Commission’s recommendations stood in stark contrast to the recommendations of the ASIC Remuneration Review, which gathered significant information from hundreds of thousands of lines of data and found no reason to remove trail commissions.
“The current structure is not broken. The removal of trail will simply hand more power to the major banks and non-major lenders and consumers will pay the price.
“Since the ASIC Broker Remuneration Review, our industry has come together to address the recommendations from the data-driven ASIC report,” he said. “Excellent progress has been made and a good consumer outcome has been defined. All members of the Combined Industry Forum are actively engaged in addressing the proposals raised by the regulator.
“In light of this progress, momentum-based decisions which ignore the full ramifications of such a move need to be carefully considered.
He added that maintaining a flexible, competitive environment meant that brokers filled vital roles in areas that the banks had vacated: helping vulnerable customers, first home buyers and those with complex borrowing needs.
“Providing assistance in these areas takes a lot of time – time that the bigger lenders are often not prepared to give,” he said.
AFG provided the Productivity Commission with evidence of the savings brokers make for their customers through ongoing contact over the life of a loan. “It is disappointing the Productivity Commission did not give sufficient weight to this evidence and we invite them again to spend time with some AFG brokers to understand the value a demonstrated level of contact with a customer can deliver.
“The ASIC Review was a significant piece of work spread over an 18-month time period and did not identify evidence that remuneration by commission led to detrimental outcomes for consumers. Our stance has always been that brokers add to a competitive industry working in the interests of consumers,” he said.
He also referred to a recent Deloitte report into the economic benefits of the broker channel which found, among other things:
- Mortgage brokers strengthen the entire Australian mortgage lending industry by fostering competition and therefore supporting all Australian home buyers and investors.
- The mortgage broker channel has contributed to a fall in lenders’ net interest margins of more than three percentage points over the past 30 years.
- Mortgage brokers drive competition by improving access to lenders that are not major banks or their affiliates. The share for these lenders increased from 21.4 per cent in 2013 to 27.9 per cent in just four years.
- The mortgage broking industry contributes $2.9 billion to the Australian economy each year, supporting more than 27,100 (full-time equivalent) jobs.
- A mortgage broker’s business depends upon delivering a good outcome for their clients- more than 70 per cent of their business is referred from existing customers.
“The last thing Australian consumers deserve is higher prices for lending products and less competition where banks can drive up costs for existing customers,” Mr Bailey concluded. “We can’t afford to jettison 20 years of competitive experience without giving regard to the findings of other reviews and ensuring a stable, dynamic, customer focused lending environment remains.”