O’Shea & Partners Lawyers

Legal Updates

Recent Legal Developments

Productivity Commission recommends banning 'trail' commissions and imposing a 'customer's best interest' obligation on mortgage brokers

As many will already know, when you go to see a mortgage broker to organise your home loan, the broker is usually paid by the bank that you end up borrowing from. The broker usually receives payment of an 'upfront' commission and then an ongoing 'trail' commission for the life of the loan. These commissions are based on the percentage of the loan, meaning the higher the amount of the loan, and the longer the term, the more the broker makes. This gives rise to a conflict of interest which Australia's finance broker's face in a typical transaction - the conflict being between their own interests and the interests of their client borrower. The conflict arises where the borrower's bests interests are served by a lower loan amount and a shorter loan term. 

The Productivity Commission's report which was released earlier this month recognises the above issue and makes two key recommendations in this respect:

  1. Trail commissions should be banned and clawbacks of commissions from brokers restricted; and
  2. All brokers, advisers and lender employees who deliver home loans to customers should have a clear legally-backed best interest obligation to their clients.

We will defer to the economists to predict how the enacting of laws reflecting these recommendations will impact on the lending and property market. Suffice to say, brokers will generally be more inclined to receommend customers against large/high risk loans and long loan terms. We and our property developer and finance clients will be watching this space. 

 

Tom O’Shea