Royal Commission calls for adviser remuneration overhaul
The final report from Australia's Royal Commission has called for a sweeping overhaul of mortgage adviser pay, including banning commission from lenders and making customers pay a fee for service.
Monday, February 4th 2019, 6:40PM 
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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.
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Comments from our readers
Going forward - will the regulators work with the industry in a collaborative way?
There are no clear or definite answers.
I have been a broker for 25 years, and my job entails ongoing service, not for the banks benefit but for the clients.
clients need annual reviews on their lending, restructuring if needed within their current lending portfolio, advice on overcoming obstacles if life deals them a blow, refixing their loans - advise on structuring housing portfolios, the list goes on and on.Only one bank pays me trails, yet I look after all my clients! regardless of the institution. Clients can be talked into changing banks not by brokers, but by adverting from other banks offering them the deal of the day! It is my job to make them understand with their current lender, to stay put as changes are costly in the end. A good broker does not churn business. In closing and from my experience, bank lenders do not have the time nor sometimes the total comprehension of a clients true needs. New applicants for a mortgage tell me things that they would never tell a bank, as trust established.Only by getting the true full picture, can a broker do the best job for the client. Hence my loosing clients of banks books is minute. The commissioner is wrong when he states, that after a "sale" the broker is done and gone. He does not understand the real world of a dedicated broker. We need to be remunerated as we do the job for the bank, as the bank does not have the time to invest in the potential new client. In the end their is more to it then meets the eye - not just a form to fill out
Going forward - will the regulators work with the industry in a collaborative way?
There are no clear or definite answers.
I guess it's up to the bank/lender to provide the ongoing services described above. SO when was the last time you joined the lengthy queue in a branch to try and get some of that 'service'? Or get an appointment with whoever sits in the chair today?
Brokers aren't the ones exporting billions of dollars of profits.
Why should a bank, whose work in getting the loan arranged was very limited, continue to benefit excessively from the loan for years to come?
I am not an adviser but in a fair competitive environment cutting advisers out of the picture is going to give consumers less choices with in my experience poorer service with a limited range of products which would be an anti-competitive approach to the industry.
Do you really think the pubic are going to pay for such a service...would you?...probably not, especially if the bank would not charge it. It looks to me like you have not looked into the industry from the inside and actually see what advisers do, the results they get or even talked to advisers clients about the value of an adviser.
What the adviser industry need is to have their own lobby group because sure as eggs, someone is driving this who commission question, and pushing an agenda. Imagine if this happened and advisers stopped getting paid by the bank, it would kill the industry overnight, so adviser groups need to pool together to ensure the survival of the adviser industry, maybe all the groups should form a lobby group instead of a fragmented approach to legislation.
My question about remuneration is that bank managers get paid, staff get paid, other service contractors to banks get paid, everyone else gets paid, but yet, when it comes to an adviser you have second thoughts. What about the staff sales targets, is that not a conflict of interest? The pressure on staff to sell services is so much that they sell their customers products they cannot really afford or need because staff need to meet sales targets, is that not a conflict of interest? how different is that from an external introducer who gets paid.
In fact, if a mortgage is sourced from an adviser it is a cost of sale, so no new mortgages no commissions paid, banks pay advisers in results.
If you think advisers are influenced by commission, then this is something you should talk to the banks about, it's not the adviser who creates commissions it's the banks, and that is exactly why they do it. Cap the commissions so no matter where an adviser goes, they cannot be influenced if you make all commission rates the same.
The banks are making billions, advisers are not, advisers are hard working, self employed business owners who have families to look after just like everyone else. They add value to the lending industry and are unbiased (compared to the bank staff who have no choice and can only recommend one bank).
So much to say, so little time.
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This comment from the article should be a concern to all and not just mortgage advisers.
"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.""
There's a strong argument in there that is fundamentally correct in its reasoning.
Not to say it is necessarily true here in NZ, though for many clients of financial advisers that can be their experience, no ongoing service from the adviser once the initial job is done.
As has been discussed in other areas, we don't have contracts for client service with the providers, though it is implied with the new legislation and code of conduct, but it is not contracted with the provider.
A slippery slope to do so as it creates issues about review and change of provider when it is needed.
There is definitely food for thought and there is room for change.
The question is going to be, will the regulator(s) do this in a collaborative way or will they continue to shoot from the hip?