Mortgage brokers will continue receiving trail commissions beyond 2020 under a federal coalition government, with Treasurer Josh Frydenberg revealing a plan to scrap them has been dropped.
"We're concerned about the impact on competition in the mortgage lending market," Mr Frydenberg told reporters on Tuesday.
Abolishing the trail commissions - which involve a fee being paid for a broker's services for the duration of a property loan - was among recommendations of the banking royal commission.
The government had vowed to grandfather existing trail commissions and abolish new ones from July 2020.
But after speaking with mortgage brokers and small lenders, it has changed its mind.
"What we're very concerned about is ensuring that mortgage brokers continue to be a critical part of our residential mortgage market and they continue to play a critical role as small businesses in our community," Mr Frydenberg said.
The issue will instead be reviewed in three years time by the competition watchdog and a financial council of the federal, state and territory governments.
Labor has committed to abolishing trail commissions if it wins the next election and has vowed to cap mortgage broker fees at 1.1 per cent of a property loan.
The treasurer said that will cause competition issues.
"Not all lenders have the ability to, with a strong balance sheet, to provide higher up-front fees. So Labor's policy will end up being a free kick to the banks," Mr Frydenberg says.
Royal commissioner Kenneth Hayne also recommended making borrowers, rather than lenders, pay upfront fees to mortgage brokers, but both sides of politics have baulked at the idea.
Labor confirmed on Tuesday that would be the only one of the royal commission's 76 recommendations it won't implement if it wins the next federal election.
Opposition Leader Bill Shorten said mortgage brokers were not "at the top of the hit list" when the royal commission was called for.
"We see the bigger banks and the financial institutions as being the bigger priority," he told reporters in Canberra on Tuesday.
The opposition will also commit to pursuing broader changes to regulations in the financial services sector, believing the complex web of laws and structures needs to be simplified.
Labor has already proposed measures that go beyond the commission's findings, including a new compensation scheme and tax on the banks to pay for financial counsellors and domestic violence services.
The government has given qualified support to about a dozen recommendations made by Commissioner Hayne.
