Time to end upfront comp?

The very suggestion will rile Canadian brokers, but a growing number of their global counterparts are facing calls for a ban on upfront commissions – a way of better protecting loan quality.

Time to end upfront comp?
The very suggestion will rile Canadian brokers, but a growing number of their global counterparts are facing calls for a ban on upfront commissions – a way of better protecting loan quality.

“Experience has shown that commissions paid upfront tend to encourage less rigorous attention to loan application quality,” concludes a recent guideline paper from the Australian Prudential Regulation Authority, the Down Under equivalent of FSCO.

The assertion – brokers are more likely to withhold key client information under the traditional system of remuneration than the trailer model – was echoed by several Australian lenders in August as part of a broad regulatory inquiry process meant to better protect the country’s broker channel.

Still, the idea of shelving traditional compensation models as a way of holding brokers more accountable is also garnering interest in other global markets, including the U.K. and the States, as supporters of trailer fees press their case for reform.

The call for a similar paradigm shift in Canada has been more muted, although a growing number of brokers voluntarily increased their proportion of trailer fee deals as a hedge against any future originations slowdown.

But the majority of players in this country continue to opt for the traditional compensation structure. Several have balked at the suggestion that disclosure to lenders would be improved under that newer model.

The reaction to another proposal before Australia’s Financial System Inquiry is also raising broker eyebrows both there and in this market.

Financial services firm EY asked the inquiry last week to consider the introduction of a fee-for-service requirement to mitigate conflicted remuneration in mortgage brokering. That model would see borrowers pay brokers directly – even for A deals.

“A fee-for-service requirement, whereby payments are made directly from the customer to the broker, as opposed from the product manufacturer, would largely mitigate this conflict,” writes EY in its submission.