Banking royal commission: trailing commission ban to hit brokers and financial planners

Financial planners and mortgage brokers will have up to three years to fatten their books before losing their trailing commissions.

Royal commissioner Kenneth Hayne. Picture: AAP

Financial planners and mortgage brokers will have up to three years to continue charging trailing commissions before the Coalition would cut them off in response to the royal commission recommendations for a wide-ranging overhaul of conflicted remuneration.

Trailing commissions for mortgage brokers and financial advisers should be banned, upfront commissions for life insurance cut to zero and limits imposed on the amounts third parties can be paid for selling general insurance products, commissioner Kenneth Hayne said in his final report.

The recommendations could send shockwaves through the intermediaries who play a dominant role in financial product sales, with much of their wealth linked to the recurring income from accumulated trailing commissions across managed funds, mortgages and life insurance.

Banning commissions could mean lenders, such as small business operators, would be forced to pay a fee when using a mortgage broker.

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

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

GRAPHIC: Hayne’s key recommendations

Tribeca Investment Partners portfolio manager Jun Bei Liu said she expected bank stocks to rally today, but wealth stocks including IOOF would likely be hit by investors because of the removal of grandfathered commissions.

“The main thing for the financial advice industry is the removal of grandfathered commissions, which is quite meaningful,” she said, noting IOOF would take a large hit.

“Share prices will react very quickly; the companies will have to work out what they want to do.”

The Hayne final report called for grandfathered commissions paid to advisers to be scrapped as soon as practicable, and the federal government has said it agrees but has committed only to a ban starting in January 2021.

The report said the government should introduce a best interest test for recommending loans to a borrower and said the borrower rather than the lender should pay mortgage brokers any fees for a home loan.

Josh Frydenberg said the government would review that recommendation in three years. He said changing the commission structures in mortgage broking and financial advice could be disruptive for the industry.

The report calls for a two-to- three-year transition period starting with the banning of trailing fees for mortgage brokers followed by a ban on other forms of commissions to mortgage brokers.

Such a move could threaten upheaval in the mortgage industry, with brokers already accounting for more than one in two mort­gages written in Australia and listed business such as Mortgage Choice holding a substantial “trail book”.

Under this proposal, the cost of the service could be added to the total value of the loan.

Mr Hayne said to preserve competition in the market, banks could be required to charge an explicit fee for loans written directly with the customer and it should be no more than the 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.

Mortgage brokers fear a move against trailing commissions would undermine their business, handing the market back to banks.