Fuel watch-style website urged for mortgages

The Productivity Commission has recommended an overhaul of the way the mortgage brokers get paid.

Trail commissions should no longer form part of a broker's remuneration structure, the Productivity Commission has recommended to the government.

While the Productivity Commission (PC) has not recommended that consumers pay mortgage brokers directly through fees for service — as was mooted in the 640-page draft report — it has put forward a recommendation for trail commissions to be removed.

The PC's outgoing chair, Peter Harris has suggested trail commissions were a conflicted form of remuneration that creates "perverse incentives" for brokers by "rewarding" them for keeping customers in their current loan.

"Trail commissions must be abolished — as they have already been in other parts of the financial system," the report said.

But brokers argue trail is needed to assist clients post settlement with discharges, pricing requests, product changes, splitting loans, fixing loans, IO conversions, construction progress payments, phone calls on future deals that never proceed, general advice and loan reviews.

"The clients are not paying for the trail, the bank is," one broker said.

"I have never had a client say, "I would rather you charge me than you receive trail."

The commission's final report into Competition in the Australian Financial System contains 11 rec'ommendations related to mortgage broking and home loans.

The report also described a cosy environment where the oligopoly enjoyed by the big four banks is the dominant feature that has allowed the major banks to keep prices elevated, provide inferior products and stop smaller competitors from growing.

It calls out "a blizzard of barely differentiated products" that create "the illusion of choice" as an example of the tactics deployed by the banks to maintain market share.

One recommendation would see APRA tasked with delivering data to ASIC, which would maintain a 'fuel watch' style website for mortgages.

The PC wants to scrap trailing commissions for several reasons, including their potential to add additional costs to all home loan borrowers regardless of which channel they choose.

The PC said it had not been able to prove this conclusively as "lenders were not forthcoming when we asked them to explain further the basis for aggregator ownership".

The PC lashed the banks for exploiting the structure of the market to the detriment of loyal customers, zeroing in on strategies such as opaque pricing and introductory rates as being symptomatic of a wider problem.

"The huge product variety combined with price obfuscation provides latitude for exploitative price discrimination, with associated profit opportunities for the relevant financial institutions," the report said.

"Typically, it is existing customers that get a poor offer, as institutions jostle to attract new customers with products that offer temporary benefits (such as discounted interest rates and fee-free periods)."

It found customer loyalty or inertia could add as much as 0.4 percentage points to the cost of a mortgage or up to $87 dollars a month.

"Approximately half of the average loan price that major banks charge is estimated to be a premium over the marginal cost," the report found.
"Although there is no explicit encouragement for banks to cluster around a particular level of return or interest rate, their observed tendency to do so is a persistent feature of the market."

Prime Minister Malcolm Turnbull said the sector had a long way to go to restore its reputation and the government was on high alert for news of misconduct.

"We are determined to hold the wrongdoers to account and we are changing the law to make sure that banks do the right thing," he said on Friday.