Coalition in retreat on mortgage broker commissions

Treasure Josh Frydenberg has delayed a plan to ban mortgage broker ­trailing commissions.

Treasurer Josh Frydenberg. Picture: Gary Ramage

Josh Frydenberg has delayed a plan to ban mortgage broker ­trailing commissions, included in the government’s adoption of Kenneth Hayne’s royal commission recommendations, pushing out a review on the payments to 2022 following a sustained campaign by the broking industry.

The Treasurer said yesterday the government had made the policy shift because it wanted to maintain competition in the mortgage ­market, amid concerns that only the largest banks could afford to pay steeper upfront ­bonuses to brokers if trailing ­commissions were abolished.

If the Coalition remains in power, the issue will be reviewed in three years by the Australian Competition & Consumer Commission and the Council of Financial Regulators. Labor plans to ban trailing commissions from lenders to mortgage brokers — usually a 0.2 per cent commission of the value of a loan paid annually over the life of a mortgage — from July 2020.

The Reserve Bank, a member of the CFR, had raised concerns that structural change in the mortgage broking industry could give the major banks a free kick to out-compete smaller lenders that lack branch networks.

“The ­abolition of trailing commissions from July 2020 won’t proceed as first announced,’’ Mr Frydenberg said. “The reason is we’re concerned about the impact on competition in the mortgage lending market.”

“Small lenders and mortgage brokers are an absolutely critical part of competition in that ­market.”

Opposition Treasury spokesman Chris Bowen has promised to set up a flat, upfront commission for brokers to prevent banks competing to offer bigger commissions for a customer, at about 1.1 per cent of the loan.

Mr Bowen said yesterday Mr Frydenberg’s claim last month that Labor had engaged in a “humiliating” backflip over its own backdown on Mr Hayne’s recommendation had “aged well”.

But the government’s decision to go against the former High Court judge’s proposal was welcomed by the industry.

Aussie Home Loans chief executive James Symond said the move was a positive step.

“We believe the current commission structure provides the right outcome for our customers, while preserving competition in home lending and our thriving mortgage broking industry,” Mr Symond said.

Trailing commissions charged to borrowers run close to $3 billion a year, with brokers earning $6000 in trailing commissions for an average home loan of about $350,000.

Mr Hayne said the “chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing”.

Mortgage & Finance Association of Australia chief executive Mike Felton said trailing commissions for mortgage brokers were “deeply misunderstood” and “confused with ongoing commissions earned by other financial services providers”.

“They are not the same. Trail commission for brokers is contingent income that was once paid at the start of the loan, but which is now paid over the life of the loan, provided the loan remains in good standing,” Mr Felton said.