Banking royal commisison: Trailing commissions should be banned

Recommendations to cut commissions for mortgage brokers and financial advisers will send shockwaves through industry.

The report said borrowers rather than lenders should pay mortgage brokers any fees for a home loan and calls for two-to three year transition period. Picture: Paul Miller/AAP

Trailing commissions for mortgage brokers and financial advisers should be banned, the royal commission said in a series of recommendations that will send shockwaves through the intermediaries that play a dominant role in financial product sales.

The final report of Commissioner Kenneth Hayne also recommends that commissions on life insurance policies worth more than $6 billion over the past five years be reduced to zero once the corporate regulator completes a review of remuneration in the industry.

But Mr Hayne’s recipe for addressing conflicted remuneration in the financial services industry stopped short of the widely feared structural separation of advice and product manufacturing in the wealth management industry, describing it as a “very large step to take.”

The recommendation spells a reprieve for financial services giant AMP and rivals including IOOF and Westpac Banking Corp, which have resisted moves by others to sell or spin off parts of their wealth businesses

The report said borrowers rather than lenders should pay mortgage brokers any fees for a home loan and calls for two-to three year transition period.

In that time trailing fees to mortgage brokers to mortgage brokers should be banned, followed by a ban on other forms of commissions to mortgage brokers that already account for more than one in every two mortgages written in Australia.

Under his proposal the cost of the service would be made explicit and could be added to the total value of the loan.

Such a change would have huge repercussions for listed and unlisted businesses that have built up large “books” of commissions that last for the life of a customers loan and provide a growing source of annuity payments to the company and its brokers.

Mr Hayne said that to preserve competition in the market banks could be required to charge an explicit fee for loans written direct with the customer and it should be no more than cost of writing the loan without a broker.

“If only brokers end up charging a fee, customers may cease to use their services, which would eliminate any potential benefit that brokers can have on competition in the residential mortgage market,” the report says.

In its response the Government said it would ban new trailing commissions from July 2020 and limit upfront commissions to the amount of the loan drawn down, rather than to the total value of the loan.

It would also introduce a two year limit on the clawback of commissions paid to aggregators and brokers.

The Government said it wanted to see the impact of banning trailing commissions as well as a recommendation that the law be amended to require brokers to act in the best interest of the client before committing to further reforms

It has committed to ending grandfathered commissions on financial advice — hard won by the industry in the battle over Labor’s Future of Financial Advice reforms — by January 2021.

“Even if the arguments relied on to justify the grandfathering of exception were valid when that exception was introduced, it is now clear that they have outlived their validity,” Mr Hayne said

The response leaves various intermediaries to accumulate commissions for another two-to-three years, but facing a bleak future beyond that.

Mr Hayne stopped short of recommending structural separation of advice and product manufacturing for the wealth industry, which was seen as an existential threat to AMP.

Mr Hayne said there was “almost no support” for enforced separation in submission, and many warnings that benefits including economies of scale and convenience for customers in having a relationship with a single financial institution would be lost

“Enforced separation of product and advice would be a very large step to take,” Mr Hayne said.

“It would be both costly and disruptive. I cannot say that the benefits of requiring separation would outweigh the cost.”

Mr Hayne said the Productivity Commission had concluded that “forced structural separation” was not likely to prove an effective regulatory response to competition concerns in the financial system but that the competition regulator should undertake a yearly market studies on the effect of vertical and horizontal integration in the financial system

“I am not persuaded that it is necessary to mandate structural separation between producer and advice.