"I do not think it is about making the consumer pay," he said. "It is about lenders paying for a distribution channel. That means retaining upfront payments for services. We need to make sure broker interests are aligned to consumers'," he said.
Treasurer Josh Frydenberg said on Monday that the government would ban trailing commissions from next year but decide in three years whether to shift to a customer-paid model due to concerns about the impact on competition.
Reserve Bank governor Philip Lowe said on Wednesday that mortgage broker payments were "complicated" and the government was right to "be cautious about going the full way and making the borrower pay".
Labor in no rush
Labor's Chris Bowen played down Dr Lowe's comments on Thursday, saying that was exactly what it was planning to do.
"Governor Lowe said we should proceed with caution … and that's certainly what we will do in close consultation with all involved; mortgage brokers, consumer groups, everyone,' the shadow treasurer said.
Mr Bowen noted Commissioner Hayne said the recommended fee changes should be phased in over two to three years.
"We accept the recommendation in principle but it is one the royal commission does not recommend be implemented urgently, is one that he recommends be implemented over a period of time," Mr Bowen said.
Mr McPhee said upfront payments to brokers for recommending products needed to reflect both the time, effort and expertise in advising a client and also provide a distribution channel.
"Importantly, they have provided the ability for ME to connect with those customers who would prefer to engage directly with a broker, rather than a bank," he said.
"Any changes to broking should ensure a sustainable industry that promotes competition between banks and that aligns the interest of brokers and customers."
'Perverse' if big banks win
ME Bank backed the Hayne recommendations imposing a duty of care on brokers to act in the best interests of clients. At present, brokers are only required to not suggest unsuitable loans to consumers.
He also wants regulators to boost transparency by having the RBA publish details about which loans are being recommended by brokers aligned with the major mortgage aggregators, which are intermediaries between lenders and mortgage brokers.
Most of the major aggregators are wholly – or partly – owned by the big four banks. For example, CBA, the nation's largest lender, owns Aussie Home Loans and Mortgage Choice.
The major banks source around 40 per cent of loans through brokers, are represented on the vast majority of broker panels, and account for just over 60 per cent of total loans that brokers generate, according to the Productivity Commission.
"The [major] banks get a disproportionate share [of recommended mortgages]," Mr McPhee said.
"It would be a perverse outcome if a process set up to stamp out misconduct ended up undermining an industry so important to consumers and competition."
ME Bank rejects CBA option
Mr McPhee also rejected the so-called "Dutch option", promoted by CBA chief Matt Comyn on Wednesday, who advocated a customer-paid model – where banks and brokers are forced to levy the same fee – as too bureaucratic and expensive to monitor.
"It would increase costs, regulation and government processes," he said. "We already have a good broker industry operating."
The Dutch system also enabled borrowers to offset the cost of advice and loan processing against their income tax, which is likely to be opposed by revenue-hungry governments.
When Parliament resumes on Monday, Labor will move a motion trying to force the Parliament to have two extra weeks of sittings in March so it can start dealing with royal commission recommendations.
Labor needs an absolute majority of 76 votes, which means it needs all seven crossbenchers. This includes Bob Katter, who did a deal with the majority government last year not to vote against it in such motions in return for $234 million for water infrastructure in his Queensland seat of Kennedy.
Mr Katter, a fierce bank critic, is not ruling out voting with Labor but the government was confident on Thursday he would not do so because "he wants a dam".
"We've got him locked in," said a source.
Peak industry bodies, such as the Mortgage and Finance Association of Australia, are organising a national lobbying campaign to shore up borrower and political support for the sector.