While trail commission is not expected from most lenders in New Zealand, observers of the industry are noticing a return to the remuneration method.
The payment of trail commission would follow the system used in Australia, where brokers receive an upfront commission for loans written as well as commission on each month of the mortgage repayment.
While this method is currently under heavy scrutiny following inquiries such as the Royal Commission into banking misconduct as well as a recent Productivity Commission, industry advocates believe it is the best practice.
Nick Young runs Trail Homes, a company in Australia allowing mortgage brokers to sell their trail books. He has been looking at New Zealand to assess the potential market.
Speaking to NZ Adviser, he said, “When you look outside Australia you find very quickly there’s no trail out there. When you go across the ditch and take New Zealand, there’s some green shoots.”
One of the concerns raised about trail commission in Australia is the potential for a conflict of interest where brokers could be swayed towards a product because the lender might offer more trail.
But Young believes that more New Zealand lenders will begin to offer trail commission to remain competitive.
He discussed the reasons he was such an advocate for trail and said, “They're very much in the customer’s interest because they promote longevity. They promote a relationship between the broker and the consumer. It incentivises the broker to act very carefully about what product that client takes on in the long term.
“There’s a lot of discussion in Australia about whether we should give up trails but all that does is encourage brokers to become transactional. It's the most extraordinary thing for any regulator to suggest is somehow in the consumers interest. It's not.”
Young said trail also meant brokers were less likely to push for refinancing, which was not always in the customer’s best interest.
But not only in terms of customers, he said trail can provide “stability” for a mortgage adviser’s business.
He added, “If you have got a totally transactional business some months you do very well, some months you don’t and that causes cash flow strain.
“Having half your revenue coming from trail gives a lot more stability, it means you can employ staff you can take on long term commitments. Ongoing promotional activities. Things like employing staff solely to service existing clients.
“Whereas if you’re totally upfront with your remuneration, before you take on any long-term commitments you’re going to make sure you’ve got a much bigger buffer.
“That's the way the Australia market works and increasingly because it’s good practice, we’re starting to see in NZ moving back into that position. It's just good practice.”