The Government will allow mortgage brokers to continue to collect trailing commissions on new loans with a review slated for three years down the line, Treasurer Josh Frydenberg said yesterday.
The competition regulator and the Council of Financial Regulators will conduct the review to determine how trailing commissions are operating and to consider whether upfront commissions should be continued.
He said the decision was made following consultation with the mortgage broking industry and small lenders.
Almost 60% of residential mortgages in Australia are settled through 16,000 brokers, Frydenberg said.
The channel accounts for almost 40% of all loans at Commonwealth Bank and 55% at ANZ but some banks have shown they don't need to rely on the channel. An example is Bendigo and Adelaide Bank which sources most of its loans through its network of community-owned branches, according to the RC's public hearings.
The decision is at odds with the Royal Commission's final report's recommendation on the subject, which recommended lenders stop paying brokers trailing commissions on new loans as the first step in revamping the remuneration for the profession over a two to three year timeline.
"The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending," Commissioner Kenneth Hayne recommended.
"Changes in brokers' remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers."
In the lead up to the ACCC-CFR review, the Government said it will introduce some of the measures it has already announced. Among them is the final report's recommendation to legally obligated mortgage brokers to act in the best interest of the consumers.
Other changes the Coalition plans to introduce in three years are Productivity Commission recommendations, including a new requirement that the value of upfront commissions be linked to the amount drawn down by borrowers; a ban on campaign and volume-based commissions; as well as a two year limit on clawback, starting from 1 July 2020.