Meanwhile, the commission said there was not a case for changing responsible lending laws – one of the most closely-watched issues in financial markets.
Commissioner Kenneth Hayne said banks should firstly be banned from paying trail commissions on new loans, with the remaining up-front commissions to be phased out over two to three years.
Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come.Kenneth Hayne
Commissioner Hayne said the “chief value” of trail commissions – which is typically worth about 0.15 per cent of a loan – was that they were “money for nothing.”
“Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?,” commissioner Hayne said.
“It cannot be that they are deferred payment for fees earned earlier when the amount paid as trail depends upon the length of the life of the loan.”
The government said it agreed with moves to stamp out conflicted payments in mortgage broking, and it would ban the payment of trail commissions on new loans from July 2020.
But it was more cautious towards the commission’s recommendation to phase out up-front commissions, which make up the majority of the $2.4 billion a year banks pay to mortgage brokers.
Citing competition concerns, the government said that from 2020, it would require the value of up-front commissions be linked to the size of the loan being drawn – a change the industry is already making.
Finance Brokers Association of Australia managing director Peter White said getting rid of trail commissions could increase interest rates.
“This could force up-front commissions to rise in order to compensate for reduced revenues to brokerages, which in turn will lift interest rates and make housing affordability more difficult,” Mr White said.
Mr White also said customers would not pay a fee to use a broker, and the proposal threatened to "destroy" about 20,000 businesses and harm competition in mortgage lending.
The government also said it would ask the country’s top financial regulators and the competition watchdog to assess the impact of these changes in three years.
Another key point of interest in the $1.6 trillion mortgage broking market will be the commission’s call for no further changes to responsible lending laws – which affect how banks assess customers for credit.
Although the inquiry had previously raised concerns about banks’ over-reliance on an external benchmark known as the Household Expenditure Measure (HEM) when assessing customers’ living expenses, commissioner Hayne said banks were taking steps to cut their use of the benchmark.
“If this results in a ‘tightening’ of credit, it is the consequence of complying with the law as it has stood since the NCCP Act came into operation,” commissioner Hayne wrote.
The findings come after last year's public hearings questioned whether banks were complying with responsible lending laws. These require banks to make "reasonable inquiries" into customers' finances.
Public hearings in March last year put the spotlight on lenders relying too heavily on the Household Expenditure Measure (HEM) as a proxy for customers' living expenses, instead of checking out their actual living costs.