Mortgage brokers may see major changes to their pay model as pressure to limit their commissions grows. A regulatory change to their remuneration could mean capping their commissions or the introduction of a flat-fee model.

But lower broker pay may not necessarily mean lower rates for customers and may become yet another brake on the cooling property market. Changes to broker remuneration could lead to more expensive home loans because major banks may gain a stronger hand in setting loan terms and rates – especially when it comes to groups such as first-home buyers.

Commissions under fire

Broker commissions came under intense scrutiny at the Banking Royal Commission’s hearings in March this year, prompting concerns over conflicts of interest in mortgage lending. Mortgage broker pay also came under fire when a Productivity Commission report on financial services competition suggested brokers were not acting in their clients’ best interest and questioned the relevance of trail commissions.

At least one bank has announced changes to its broker remuneration model following the Royal Commission hearings. Bankwest said in April that it would reduce its trail commissions, reintroduce year-one trail commissions and change other commission payments from July 2018.

Mortgage brokers have expected these changes since the Combined Industry Forum (CIF) released a package of changes to broker commissions in December 2017.

The CIF, which aims to improve mortgage brokers’ governance and remuneration practices, proposed that lenders stop paying volume-based and campaign-based commissions, among other changes. Following this, ANZ changed its upfront commission structure and stopped paying volume-based incentives from February 2018.

Regulation would create a bigger impact

The bigger impact on mortgage brokers’ remuneration would come from a potential regulation reducing broker commissions as a result of the Royal Commission. A recent report from research firm IBISWorld said regulators could replicate the life insurance remuneration model for mortgage broker commissions. Regulators have reduced and capped life insurance advisers’ ongoing and upfront commissions beginning January 2018.

On an average new home loan, lenders typically pay mortgage brokers an upfront commission of around 0.62% of the loan value and a trail commission of 0.18% a year. Some may also pay volume-based and other commissions.

The Royal Commission scrutinised potential conflicts of interest in this remuneration structure in cases where brokers work with bank-owned aggregators and direct customers to those banks. It questioned if some incentives created an “unacceptable risk” that brokers would prioritise sales over their client obligations, and if upfront and trail commissions should be replaced with flat-fee payments.

ASIC supports flat-fee model

The Australian Securities and Investments Commission (ASIC) said in its response to the Royal Commission that certain volume-based incentives generate conflicts of interest that “create an unacceptable risk of poor consumer outcomes”. It identified ‘soft dollar’ payments and volume-based commissions for mortgage brokers as unacceptable. Soft dollar payments refer to benefits brokers receive other than commissions, including travel incentives.

The regulator also said in its submission to the Royal Commission that a flat-fee payment by the lender to the broker might avoid conflict in product strategy. It might also allow for a more effective fee disclosure because customers can readily compare competing products.

“A flat fee would appear to avoid product strategy conflict, [as] decoupling the size of the commission or payment from the size of the loan removes the incentive to recommend larger loans,” it said.

CBA acknowledged that broker commissions can lead to a conflict of interest because they are linked to the loan size – the bigger the loan, the bigger the upfront and potentially trail commissions. Brokers can maximise their income by getting the largest loan possible approved, creating a conflict of interest between customers and brokers, said the bank in a submission to the Royal Commission.

NAB, on the other hand, said in its submission that upfront and ongoing trail commissions do not lead to poor customer outcomes.

Brokers warn about impact

Mortgage brokers have warned that an overhaul of their remuneration model would only benefit the big banks and disadvantage customers. Moving to a fee-for-service model, as suggested by the Productivity Commission, would deny some customers such as first-home buyers access to expert advice in navigating home financing. Without brokers, major banks would have more power over customers, said the Mortgage & Finance Association of Australia in its submission to the Productivity Commission.