Trail commissions are valuable to brokers and brokerage businesses. Because they are valuable, brokers and brokerage businesses resist any change to trail commissions. But it is necessary to look not only at how trail commissions are valuable to those that receive them, but why they are valuable to both the party receiving the payments and the party making them.
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.[1]
It is said that trail commissions stand as an incentive for brokers not to ‘switch’ borrowers in and out of different mortgage arrangements. It is said that the payment of trail commissions somehow keeps the broker ‘in touch’ with the borrower. But how and why the payment of trail commission is necessary to achieving either of these results has not been satisfactorily explained. Problems arising from unnecessary ‘switching’ or ‘churning’ of home loans are more effectively addressed by providing for ‘clawback’ of commissions or fees (repayment of commissions or fees if the borrower defaults, or the loan is paid out within a short period). In this connection, I note, and if commission payments were to remain, I would support, the recommendation made by the Productivity Commission to prohibit commission clawbacks from being passed on to borrowers.[2]
As the Aussie Home Loans broker misconduct case study showed, brokers are astute to do nothing that will interfere with the continued flow of trail commissions.[3] Why would they? In the examples considered in that case study, possible adverse effects on borrowers were not seen as reason enough to risk disturbing the overall flow of trail commissions by asking whether the misconduct identified in relation to particular loans might have occurred in connection with other loans the broker had negotiated.[4]
On the other side of the ledger, the chief value of trail commissions to the lenders that pay them is that they represent another force binding the broker to the lender. Their payment contributes to the lenders being able to treat brokers as the lenders’ sales channel. As the Productivity Commission found, ‘trail commissions have the effect of aligning the broker’s interests with those of the lender, rather than those of the borrower’.[5] I agree. It is unsurprising, then, that lenders would not want to be seen as standing apart from industry practice by advocating some change to existing arrangements.
[1] Productivity Commission, Report 89, 29 June 2018, 42, 328.
[2] Productivity Commission, Report 89, 29 June 2018, 331.
[3] FSRC, Interim Report, vol 2, 40–2.
[4] FSRC, Interim Report, vol 2, 40–1.
[5] Productivity Commission, Report 89, 29 June 2018, 329.