Trail commissions have been dealt another blow, with the Productivity Commission recommending that they be banned in mortgage broking for all loans originated from the end of 2018 in its final report into competition in the Australian financial system.
The PC recommended reforming mortgage broker commission structures, saying that an enforceable code applying to all mortgage lenders should be created and imposed by the Australian Securities and Investments Commission (ASIC).
“There is little if any evidence to substantiate the claim that trail commissions are a payment for the ongoing provision of services to borrowers. In practice, trail commissions have the effect of aligning the broker’s interests with those of the lender, rather than those of the borrower,” the report said.
It recommended that the proposed code would implement the following changes to broker remuneration structures:
- Ban the payment of trail commissions in mortgage broking for all loans originated after end-2018;
- Require upfront commissions to aggregators and brokers to be paid based on the funds limit drawn down by customers, net of offset, instead of the limit of the loan facility;
- Ban the payment of volume-based commissions, campaign-based commissions and volume-based payments; and
- Limit to two years the period over which commissions can be clawed back from aggregators and brokers.
The report also found that that state of competition in the banking system posed issues for the financial system but recommended little in this area.
“Price competition in the banking system is limited. Although institutions claim that they compete in loan markets by discounting, such behaviour is not indicative of a competitive market when price obfuscation is common and discounts are specific to groups of customers,” the PC reported in its findings.
“Australia’s banking sector is an established oligopoly with a long tail of smaller providers … As a result, the major banks have the ability to pass on cost increases and set prices that maintain high levels of profitability — with minimal loss of market share."
The PC characterised the Big Four banks as having a "too big to fail" status, whic reflected an expectation of government intervention should they hit financial difficulties.