Neither the Coalition nor the opposition will implement the banking royal commission’s proposed changes to the ways mortgage brokers are remunerated by banks.

The news comes despite repeated calls from consumer advocacy groups as far back as 2015 to ban commissions in the industry.

Tuesday afternoon saw both Treasurer Josh Frydenberg and shadow finance minister Clare O’Neil confirm their respective parties’ stance on the controversial recommendation.

Ms O’Neil said in a speech to think tank Committee for Sydney that Labor would fully implement all recommendations except the changes to broker remuneration, and would instead look for alternative ways to mitigate the conflicts of interest outlined by Commissioner Kenneth Hayne.

Separately, Mr Frydenberg said government will not ban trailing commissions, but introduce a legal compulsion for mortgage brokers (along with a number of other changes) to act in the best interests of clients, and re-assess commissions in three years.

Trailing commissions are an annual fee paid by an institution to a broker annually during the life of a loan.

Opponents of the system have asked for broker fees to be paid upfront by the buyer in a bid to increase transparency.

Policy out of step with consumer groups

Choice director of campaigns and communications Erin Turner told The New Daily that this argument hinged on a “misconception” that brokers are a competitive force; an idea she added had been disproved by the Productivity Commission.

“Mortgage brokers in the ’90s did play a role in introducing competition, but many have been captured since then and are owned by big banks, or partner with aggregators that are owned by the big banks. Mortgage brokers largely aren’t the independent parties we hope they are,” Ms Turner said.

“If you’re being paid by a big bank, you can’t work for a customer.”

Commissioner Hayne’s recommendation was broadly in line with changes that Choice, along with other consumer groups, has been advocating for several years, and Ms Turner said it was disappointing to see it rejected by both sides.

“It’s a shame that political parties aren’t bold enough to tackle this recommendation yet; I put that down to the strength of the mortgage broking lobby. They’ve been calling and meeting with politicians and beating down their doors since well before this final report,” she said.

“Commissioner Hayne actually highlighted this. He highlighted that reform after reform in the financial services sector has been watered down due to the strength of lobbying.”

Ms Turner noted that even the government regulator ASIC recommended changes to commission and bonus structures in the industry following its 2017 review of mortgage-broker remuneration.

However, in that report ASIC recommended commission structures be modified to reduce conflicts of interest and reviewed after three or four years, rather than being scrapped entirely.

Incentives a bigger problem

University of New South Wales associate professor Mark Humphery-Jenner said that commissions in the mortgage broking space were not “in and of themselves” a problem, but additional incentives offered in the sector do need “reining in”.

These problems include “soft-dollar commissions and volume-based incentives”, such as free conference tickets or other rewards offered to brokers for giving a large amount of business to a specific lender.

Incentives like these are “opaque and harder to monitor” than ordinary commissions, Mr Humphery-Jenner said, but are a prevalent feature of the industry that ASIC’s 2017 report identified as a risk to consumers.

Both Ms O’Neil and Mr Frydenberg pledged to address conflicts of interest in the broking space through other means, with the latter promising a ban specifically on “campaign and volume-based commissions”.