A win for competition on loans

In the interests of homebuyers, the Morrison government has made a prudent decision to uphold competition in the mortgage market. On Tuesday, Treasurer Josh Frydenberg announced the government had scrapped its plan, announced last month, to ban mortgage brokers’ trailing commissions from July 2020. If the Coalition retains power, the issue will be reviewed in 2022 by the Australian Competition & Consumer Commission and the Council of Federal Financial Relations.

Aside from benefiting homebuyers who use brokers to find and secure their loans, the decision is a major win for the mortgage broking industry, which employs 26,000 staff in 17,000 firms. The industry has lobbied hard for a reprieve since banking royal commissioner Kenneth Hayne recommended an end to brokers’ trailing commissions. It was the only one of his 76 commission recommendations the Treasurer did not accept in its entirety. In his final report six weeks ago, Mr Hayne called for a new structure in which borrowers would pay mortgage brokers’ costs. The chief value of trailing commissions, he said, “is that they are money for nothing”. On an average home loan of about $350,000, a broker would earn about $6000 in trailing commissions.

But as the Productivity Commission has acknowledged, mortgage brokers have been helpful in providing competition in the home loan market. The Reserve Bank has also raised concerns that only the largest banks could afford to pay steeper upfront ­bonuses to brokers if trailing ­commissions were abolished. Competition between lenders is important if markets are to work to the advantage of customers.