Trail is on the chopping block in the yet-to-be-released PC report, according to The Australian
The Australian reported last week that the Productivity Commission “has provided a policy solution to eliminate the perverse incentives” of trail in its unreleased final report on Competition in the Australian Financial System.
The final report was handed to the government on 29 June. The government has 25 sitting days to review the report before tabling it to Parliament.
In the PC’s draft report, released in February, it stated that “trail commissions create perverse incentives for mortgage brokers by rewarding them for keeping customers in their existing loan. Broker loyalty appears skewed towards the institution, not the customer, and thus likely discourages refinancing”.
It also stated that the inclusion of commission clawbacks act as a “direct disincentive to consumer switching of home loans”.
At the time, the Commissioned asked for feedback on the rationale of how brokers’ commissions are structured, including the contractual and other obligations imposed on brokers in connection with trail, trails that increase over time and clawbacks.
Many industry associations, broking franchises and individual brokerages condemned the draft report’s findings on trail and upfront, stating that the commission clearly misunderstood the job of brokers and their remuneration structure and could force the collapse of the industry by making sweeping changes.
The PC’s stance on trail
Based on ASIC’s findings, lenders pay brokers an upfront commission of $2,289 (0.62%) and a trail commission of $665 (0.18%) a year on an average new home loan of $369,000. Trail is worth $1bn p.a., according to the PC.
“Overseas we know that where brokers do exist, this particular proposition [trail] doesn’t … it doesn’t suggest that the world will collapse if this proposition isn’t there and the question is what incentive structures would be preferable?” Productivity Commission chairman Peter Harris said in March.
Harris previously told MPA that the Productivity Commission was not trying to scrutinise brokers’ payment structures “because we hate brokers” but because it wanted to understand who is incentivised by whom and to do what in the name of competition.
“Whereas once it was very clear brokers were a force for competition, the question is now, particularly with bank ownership having gone as far into the channel as it has, are they strongly incentivised to be a force for competition or are they really an information broker?”
Harris said the fact brokers are being paid a trail commission to look after the customer, and yet the financial institutions have no measurement of what they’re getting for that payment or if it does indeed prevent churn, doesn’t stack up when there are a number of far more direct ways of achieving that objective.
“It is plausible that brokers have substantial market power here and that market power could be exercised in the consumer’s interest or it could be exercised in the personal interest of the broker, we just don’t know,” he told MPA.
The CIF defends trail
In its submission to the Productivity Commission, the CIF explained that trail provides an ongoing income stream “so that the broker can appropriately service the customer over the life of the loan”.
“Trail is also used as a lever to promote good customer outcomes, as it is standard industry practice to ‘switch off’ if the loan goes into arrears or enforcement action is taken. It is the CIF’s firm view that trail is not a barrier to switching or a disincentive for brokers to service clients.”
To deal with any potential conflicts of interest related to the current commission structure, the CIF has proposed that trail be paid on the amortised drawn down amount net of offset account balances, or based on facility utilised, and that clawbacks remain in place.
The CIF has also proposed an improved governance and oversight framework by lenders and aggregators that would monitor and review such things as trail payments to brokers.
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