Borrowers may have to contend with substantially higher interest rates if mortgage brokers’ pay packets are sliced, according to the Finance Brokers Association of Australia (FBAA).

Peter White, executive director of FBAA, said calls to reduce the commissions paid to mortgage brokers risked sending the lending market back to the “dark days of the 1980s,” when customers were forced to deal directly with individual banks charging huge margins.

“In the 1980s, when there were no brokers, the margin was 6 per cent plus cost of funds, so if you replicated that in today’s environment, borrowers would be paying a 7-7.5 per cent variable rate, not the 4 per cent we see today,” he said.

White’s comments come on the back of the Australian Securities and Investments Commission’s (ASIC) industry-wide review of mortgage broker commissions. The review, which was completed in March, unearthed numerous problems with the current structure.

“The Review found that the current mortgage broker remuneration and ownership structures create conflicts of interest that may contribute to poor consumer outcomes,” said an official release on the website of The Treasury.

Aberrations include brokers being incentivised to place borrowers into larger loans than they can afford and brokers being swayed towards lenders offering the biggest commissions at the time.

Last week, leading consumer groups, led by Choice, released their submissions to the public. Among other recommendations, the group called for mortgage broker commissions to be discontinued to better serve the needs of home loan customers.

Before the consumer group submissions were released, brokers and banks had been in close negotiations to create a “self-regulation scheme” to deal with broker commissions. This had the apparent tentative support of ASIC, and by extension, the federal government.

However, the consumer group submissions have seriously called this proposal into question. Erin Turner, head of Choice campaigns, described the self-regulation scheme as being harmful towards consumers, as it would leave the “fox in charge of the hen house”.

While Turner says the group fully supports the mortgage broking industry, she sees trail commissions as being a drag on the free market, and ultimately, an indirect impost on borrowers.

“I am baffled that brokers get paid a trail commission for ongoing customer service,” Turner said. “What ­service are mortgage brokers providing month-on-month after the loan is written?”

Choice and other consumer groups have called for trail commissions to be banned and for upfront commissions to be replaced with flat fees. According to ASIC, brokers on average write loans that are higher than those written directly by lenders.

Therefore, ASIC recommends that commissions not be linked to the size of the loan, arguing that doing so incentivised mortgage brokers to write loans as big as possible, which could be larger than what some borrowers needed.