Brokers return fire over trailing commissions plan

Mortgage brokers warned against a ‘kneejerk’ reaction by investors as their share prices were smashed.

Chief executive of broker Mortgage Choice, Susan Mitchell. Picture: John Feder

Mortgage brokers warned against a “kneejerk” reaction by investors as their share prices were smashed by as much as a third over recommendations to ban trailing ­commissions paid by lenders and potentially shift the cost to ­borrowers.

Amid warnings from industry bodies that full adoption of the recommendations would rip up a ­lucrative source of annuity income for the intermediaries and devastate the 17,000-strong broker market, investors took flight yesterday.

Mortgage Choice shares fell 25.2 per cent to 78.5c, rival AFG plunged 29.1 per cent to 90c while Goldfields Money dropped 12.8 per cent to 68c.

Trailing commissions that would be banned from July 2020 account for a quarter or more of the revenue and earnings for brokers, who write almost 60 per cent of mortgages in Australia.

But Mortgage Choice chief executive Susan Mitchell said the market may have overreacted to the recommendations because the industry would have a chance to shape the final fee model in discussions with the government. Ms Mitchell said the trails could still be acquired up to June 2020 and existing commissions would be “grandfathered”.

78.5¢ Mortgage Choice closed down 25.2% q

Brokers might also be compensated with higher upfront commissions, with the government baulking at a recommendation to end other commission payments by lenders within three years.

Commissioner Kenneth Hayne’s recommendation to shift to a Dutch model that has the borrower pay the broker for the service was the only one of 76 recommendations not endorsed by Treasurer Josh Frydenberg. He said the government would review the recommendation in three years to assess the impact of ending trails and introducing a formal “best interest” requirement for broker loan recommendations.

“This is not an immediate change, this is a long-term game,” Ms Mitchell told The Australian. “Mortgage Choice has been around for 25 years, we have been through the GFC and we can quickly adapt.”

AFG chief executive David ­Bailey said trailing commissions accounted for 25 per cent of earnings, with 40 per cent coming from its own lending and securitisation business.

“It is a bit of an overreaction,” Mr Bailey said. “The … market share of brokers highlights the value of the service to consumers and the acknowledgment of this by the government indicates that any new fee model is likely to be designed to retain broker ­services. It is crucial that the transition to a new policy and regulatory landscape is a considered process to ensure any changes deliver better outcomes for customers.

“Leaving consumers and the economy worse off, which is a real danger if we don’t get this right, would undermine the whole royal commission process.”

Peter White, managing director of the Finance Brokers Association Australia, said the recommendations could undermine the role of brokers and hand more power to the big banks.

“I am very disappointed that a royal commission into banking misconduct has become an inquiry into mortgage broker remuneration,” Mr White said. He said commission costs were no different to the cost of bank branches and any reform to commissions should reflect this.