APRA has published a letter on capital treatment of trail commissions for authorised deposit-taking institutions (ADIs) using the Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk.

APRA has observed two approaches to the accounting of trail commissions both aligned to Australian Accounting Standards. APRA does not stipulate a preferred accounting approach but notes that it is subject to agreement between the ADI and its auditor.

ADIs enter into agreements with intermediaries or brokers that provide those parties with a commission for the sourcing of new mortgages (or similar products) on behalf of the ADI. These may take the form of one-off upfront payments and/or ongoing “trail” commissions.

These trail commissions are typically structured to be payable by an ADI only as long as the associated loan remains funded by the ADI regardless of whether this is securitised or on-sold. The obligation to pay the trail commission ends when the loan is refinanced or repaid by the borrower or the loan defaults.

The letter sets out when APRA will allow ADIs to net the trail commission asset with its corresponding liability when determining credit risk-weighted assets under APS 112.

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Author: David Jacobson
Principal, Bright Corporate Law
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About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.