The Royal Commission could trigger big changes in home loans

After holding seven rounds of public hearings and collecting more than 10,000 submissions, the Royal Commission into Misconduct in the Banking, Superannuation & Financial Services Industry is about to deliver its recommendations – which could turn the mortgage industry on its head.

The final report, which will be published on Monday afternoon, might recommend significant changes to how mortgage brokers get paid – which, in turn, would affect consumers.

These possible changes include:

• Changing upfront commissions (from a percentage of the loan to a standard fee)
• Abolishing trail commissions (which are ongoing commissions that the broker receives throughout the life of the loan)
• Abolishing both upfront and trail commissions (forcing brokers to negotiate a fee, as financial planners do)

Why broker salaries are relevant to consumers

There are two reasons why consumers should care about broker remuneration.

First, Justice Hayne noted in his initial report that the current commission model is bad for consumers, because brokers have incentives to push Australians to borrow more than they need. If Justice Hayne is right, then changing the model might better align brokers’ interests with borrowers’ interests, leading to better outcomes for consumers.

Second, a new commission model might lead to a reduction in the average broker’s income, which would probably reduce the number of brokers in Australia. That, in turn, would probably mean that banks would win would back some market share from brokers – which would probably mean worse outcomes for consumers.

Why would that mean worse outcomes? The reason is that brokers offer more choice than banks. A typical broker will work with 20 to 40 lenders, which means they can help borrowers compare options from up to 40 institutions. Banks, though, will only show one set of loan products – their own.

What affects brokers will also affect consumers

All of this is just speculation, though. Time will tell what Justice Hayne recommends; and time will tell how many of those recommendations will be implemented by the government.

The only thing that can be said for certain is that any reform that affects mortgage brokers will ultimately affect consumers as well.

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