Why the AFG share price and mortgage broking industry is getting smashed today

The Royal Commission recommends banning trailing commissions for mortgage brokers.

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The mortgage broking industry looks the biggest victim of the Royal Commission this week as shown by today's 32% fall in the Australian Finance Group Ltd (ASX: AFG) share price.

It's no surprise Hayne has singled out some of the fee-gouging business models of the mortgage broking industry that bring little value to consumers other than charging them additional fees to arrange a home loan with a bank such as Westpac (ASX: WBC).

In particular the Royal Commission has recommended banning trailing commissions from lenders to mortgage brokers for loans issued from 1 July 2020 and instead forcing them to take fees upfront.

It seems Commissioner Hayne has recognised that trailing fees mean the longer a loan the greater the potential recurring commission to a mortgage broker, although a longer loan may not be in the best financial interests of the borrower.

For its part the mortgage broking industry including AFG, Yellow Brick Road Ltd (ASX: YBR) and Mortgage Choice Limited (ASX: MOC) (down 23% today) claims that it lowers costs and increases choice for consumers by acting as a middle person between a lender and borrower.

This is only true though if a borrower does not have the capacity or time for whatever reasons to arrange their own loan directly with many free online services such as iSelect Ltd (ASX: ISU) and Canstar helping make this process easier in 2019.

Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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