The government advisory body has called for major banks put a stop to trail payments, in a report recently submitted to the Australian government.
The suggestion is part of the PC's wide-ranging report into Competition in the Australian Financial System.
The Productivity Commission was expected to call for a fee-for-service model for mortgage advisers, but stopped short of the suggestion. The PC said a fee-for-service model would drive customers away from mortgage advisers, reducing overall competition.
However, the call to end trail will anger Australian advisers, and those across the Tasman, with many of New Zealand’s major banks Australian-owned. Removal of trail commission in New Zealand would significantly hit the revenues of mortgage advisers, according to TMM’s Annual Survey. One in five mortgage advisers said trail made up 25-50% of their annual revenue.
The PC blames trail for creating “perverse incentives” for mortgage brokers, keeping customers locked into their loans, or with the same lender. "At its simplest, brokers have a strong incentive — regardless of what may be in their customer’s best interest — to give preference in their loan recommendations to lenders that pay higher commissions. This may be uncommon, but there is no obligation for transparency of the payment to prove it,"
The PC hinted its decision had been influenced by the recent Royal Commission: “The current structures of mortgage broker remuneration appear to have become entrenched more because lenders are reluctant to be a first mover in negotiating alternative approaches than because they are delivering desirable market outcomes. Evidence to the royal commission indicated as much.”
The report added: “change is required — to the role of the lender in being the paymaster — to reduce the scope for damage from conflicted advice”.
The recommendations will heap further pressure on the Australian government to make changes to banks’ commission structures. The Productivity Commission also called on mortgage advisers to end volume-based commissions “immediately”, adding: “The absence of evidence that this is occurring affects industry credibility.”