The Australian government has ditched plans to scrap trail commissions for new loans arranged by mortgage brokers after pressure from the industry and smaller lenders.
The Royal Commission recommended earlier this year that lenders should stop paying trail commission – about 0.2% of loan value, paid annually over the life of the mortgage – to brokers and said that instead, brokers should charge borrowers an upfront fee.
The recommendation was met with a furious response from Australian brokers who argued that borrowers would not pay the fees.
Initially, the government said it would prohibit the payment of commissions for new loans from July 2020. But brokers warned that the changes would cripple their business model and decrease competition in the home loan market, hurting consumers.
On Tuesday, Australian treasurer Josh Frydenberg said the government had decided not to implement the report, putting an end to weeks of uncertainty, during which brokers were offered counselling and some made plans to leave the sector.
Review in three years
Frydenberg added that the government would review the situation in three years, if it remains in office. Australian will vote in a federal election later this year. Most recent polling showed the opposition Labor Party, which proposed its own alternative to trail commission, a marginal lead.
Mortgage & Finance Association Australia (MFAA) chief executive Mike Felton said the government’s showed the case for removing broker commissions had not been made.
“Nor has it been demonstrated that existing trail arrangements lead to poor customer outcomes,” said Felton.
“Commentary from both the Australian Securities and Investments Commission and the Treasury (suggests) that consumer outcomes could in fact be worsened in the absence of trail with the possibility of increased churn, reduced quality and heightened conflicts.”
There are 16,000 mortgage brokers in Australia, employing more than 27,000 people, with 60 per cent of the country’s residential mortgages settled by brokers.