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Brokers have warned against the planned scrapping of trail commission fees paid to mortgage brokers in Australia, saying that this will only benefit major banks and not consumers.

Rather than reducing additional unwanted and unneeded costs for consumers, brokers said that this plan will simply give big banks greater leverage in home loans and make the upfront cost of commissions even higher.

In a recommendation last week welcomed by consumer groups, the Productivity Commission suggested that all banks should face prohibition from paying trail fees, which are worth some $1bn a year.

Highlighting the fact that other sectors have already removed costs such as these, the Productivity Commission said there is no reason to suggest that this would have the negative impact on consumers that mortgage brokers foresee.

However, brokers have responded by saying that the real value of these fees is to ensure that a mortgage advisor stays with a client even after a loan agreement takes place. The only other way to satisfy these needs would be to pass on additional costs to consumers in the form of a greater upfront commission fee. 

Some consumer groups have dismissed these trail fees as a “payment for nothing” and have been calling for their removal. Paid over the duration of the loan with a cost of around 0.15% of the total loan, these additional costs are passed onto consumers either way, according to the groups.

One of the leading mortgage providers, AFG, spoke in support of the current structure. Chief Executive David Bailey highlighted the fact that the Australian Securities and Investments Commission (ASIC) chose not to recommend implementing a ban despite carrying out a thorough review last year.

Citing the benefit of providing a service over the life of the loan, Bailey said that the trail commission fees continue to have merit. “The removal of trail will simply hand more power to the major banks and non-major lenders, and consumers will pay the price,” he added.

James Symond, Chief Executive of Aussie Home Loans, owned by Commonwealth Bank, said that the alternative is to put higher costs to consumers at the start with higher upfront fees. Symond added that such a move “could possibly encourage brokers to churn their customers into new loans”.

He said that the current model in place could not break if “it works well for all stakeholders”. Half of all home loans in Australia come from mortgage brokers.

Acknowledging that other countries have no trail fees and have bigger initial costs to deal with, the Mortgage and Finance Association of Australia said that it could see “substantial” rises. Canada’s rate of 1.1% is some way above Australia’s figure of 0.65%.

The Productivity Commission also called for mortgage brokers to face what it termed a “best interest duty” and said that there should be a mechanism in place to reduce the power of banks to “claw back” payments to brokers. 

Erin Turner, Head of Campaigns at Choice, said that although the commission’s recommendations are positive for consumers, it is “disappointing” that the recommendations do not go far enough. Brokers should be able to charge clients directly for services, she added.

Turner said: “If brokers are offering something genuinely great to consumers, they should be able to sell it.” She added that currently, the only bar that mortgage brokers must legally navigate is providing loans that are “not unsuitable” to consumers. A level of best practice across the board could therefore benefit all sides.