MFAA "strongly disagrees" with PC's stance on trail

The MFAA argues there's no reason or rationale for abolishing it

MFAA "strongly disagrees" with PC's stance on trail

The MFAA says it “strongly disagrees” with the Productivity Commission’s assertion that trail can create poor consumer outcomes and should be eliminated.

"We do not believe there is any rationale for removing it,” said MFAA CEO Mike Felton in a statement.

“Trail is an important control mechanism. It discourages excessive churn, incentivises quality, aligns the interests of all stakeholders in the value chain with those of the customer, and also allows the broker to continue to provide service over the life of the loan.”

The Productivity Commission, however, said while it requested evidence to substantiate the connection between trail and the ongoing services provided to clients, none were able to provide it because they said formal documentation wasn’t required.

“The reality is that trail commission is and has been paid even when services are not provided,” the Commission said.

While the Commission said it doesn’t doubt that many brokers do provide these services to clients, it also noted that given the importance and their dependence on client relationships, brokers “would likely be willing to provide some of these services regardless of remuneration”.

The MFAA said if trail were abolished, upfront commission would have to increase substantially so brokers’ net earnings are not impacted over the life of the loan, perhaps following the Canadian model which pays an average upfront of 1.1%.

“Brokers earn an average of $86,400 before tax, making their businesses vulnerable to any reduction in income. Any reduction in broker income would decrease choice, competition and the outstanding service brokers provide which would be a poor outcome for all consumers, particularly in regional and rural Australia.”

As for the Commission’s recommendation of the ‘best interest’ duty, the MFAA said imposing this obligation would be impractical given the large size of aggregators’ lending panels. It might actually prompt brokers to limit the number of accreditations they take on, which would negatively impact competition and consumer choice. The MFAA said it supports a ‘priority of interest duty’ which would ensure the customer’s interests are put before industry participants’ interests.

What happens next?
Treasurer Scott Morrison said on Friday that the government will be proceeding slowly and will be considering the report carefully.

“[There] were, a lot of [issues], canvassed in the earlier report, and they are quite complicated. The government is not rushing on that response. There will be a report from the Royal Commission in the not too distant future. And there will be another opportunity to potentially fashion any response to issues raised there or here together,” he said.

Martin North, an industry expert and principal of Digital Finance Analytics, said there have been many similarities between the legal and conduct issues raised at the royal commission hearings and the behavioural and cultural issues identified in the Productivity Commission’s final report.

“I expect parallel recommendations from the royal commission, which will build off the Productivity Commission’s report. Actually little needs to change in the law; it’s about culture and practice of the institutions and the regulators,” North said.

If the Productivity Commission’s recommendations are adopted, the industry will be forced to evolve. North believes that could lead to industry consolidation as the divide between financial advisers and brokers shrinks, prompting more players to offer both services.

“The economic model of the broking industry will be changed, and there will need to be more focus on doing the right thing for the customer. Perhaps some will even move to fee-based advice. … In the meantime, those with grandfathered trails will be feeling pretty smug.”