The recommendations come from Commissioner Kenneth Hayne's long-awaited report, following a lengthy review into misconduct in the banking, superannuation and financial services industries. Banks have been publicly censured for their practices, and advisers have also come under fire.
In the report, Hayne says "The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending." Hayne wants the change introduced over two to three years, during which period banks will be prohibited from paying trail commission and then all other forms of commission to advisers.
Hayne's proposals come after he previously indicated lender commission "might" be a conflict between banks and advisers.
Hayne said in his final report: "Value-based commissions paid by lenders to mortgage brokers are a form of conflicted remuneration. That is, value-based commissions are a form of remuneration that can reasonably be expected to influence the choice of mortgage, the amount to be borrowed, and the terms on which the amount is borrowed. The evidence from CBA showed that the size of commissions has an effect on which lender the broker recommends to the borrower.
"The size of commissions also affects the size and terms of the loan. On their face, the outcomes demonstrated by CBA’s work and described in their submission to the Sedgwick Review, and confirmed by ASIC, constitute the realisation, in fact, of the expected effect," he added.
Hayne took further aim at trail commission: "The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing. Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come? It cannot be that they are deferred payment of fees earned earlier when the amount paid as trail depends upon the length of the life of the loan. And it cannot be that they are a fee for providing continuing services given there is no obligation for the broker to do so and no evidence of it being done."
Australian adviser groups including the MFAA have taken aim at suggestions of a fee-for-service model, saying it will drive customers to go direct with their bank. Hayne suggests banks charge their direct customers a fee in order to address the balance.
He said: "When mortgage brokers are no longer paid by lenders, it may well be that lenders dealing directly with borrowers should be required to charge a fee to recover the costs that would be avoided if the loan were to be originated through a broker, but which are incurred if originated directly. This would be in order to prevent lenders competing unfairly with brokers."
The final report also recommends amending the law for mortgage advisers, to "provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower. The obligation should be a civil penalty provision".
The changes, if enforced and voted through by parliament, would represent an overhaul of the fee model in Australia. Such a move would be a concern for New Zealand advisers, who place much of their business through Australian-owned mortgage lenders.