Commissions: What They Are and How They Work

Updated 12 Mar 2026Content was accurate at the time of publication

Commissions are a central feature of many financial services and insurance arrangements — yet they're often poorly understood. This plain-language guide explains what a commission is, who pays and receives them, common commission types (upfront, trail, flat, percentage, bonuses and clawbacks), how commissions are calculated with worked examples, the disclosure and regulatory obligations under ASIC guidance, and the practical questions consumers and intermediaries should ask.

What is a commission?

A commission is a monetary benefit paid to an intermediary, broker, adviser or referrer by a product issuer or distributor for arranging, selling or servicing a financial product. Commissions may be:

Percentage-based (for example, a percentage of an insurance premium, loan balance or assets under management), or
A flat fee per sale or referral.

Commissions are a form of remuneration that compensates distribution activity but also creates incentives. Knowing the commission structure and timing helps consumers assess potential conflicts of interest and helps intermediaries meet disclosure and record-keeping obligations.

Who receives commissions?

Common recipients include:

Insurance brokers and agents (for placing policies)
Mortgage brokers and loan intermediaries
Financial planners and product distributors (superannuation, managed funds)
Online platforms and comparison sites that refer customers
In-house distribution teams or aggregators receiving volume-based overrides or bonuses

Payers are typically product issuers: insurers, lenders, fund managers or manufacturers. Commissions also arise in commercial arrangements such as asset finance placements.

Common types of commissions

Key commission types and how they affect incentives:

Upfront (initial) commission — A one-off payment at the time of sale or placement (common in insurance and loan origination).

Trail (ongoing) commission — Ongoing payments tied to the life of the product (for example, a percentage of premium at each renewal or a percentage of outstanding loan balance).

Flat fee — A fixed amount per sale or referral (not percentage-based).

Percentage commission — Calculated as a percentage of premium, loan value or AUM.

Volume/bonus/override — Additional payments for meeting sales targets or volume thresholds; can create extra incentives.

Referral fees — Payments to a referrer who introduces a customer to a product or service.

Clawbacks (repayments) — Repayment obligations when a sale is cancelled, the product ends early, or performance conditions are not met. Clawbacks commonly apply to upfront commissions and are repaid pro rata over an agreed period (for example, 12–36 months).

Clawbacks protect issuers and affect the net commission an intermediary retains over time.

How commissions are calculated — simple examples

Values are illustrative.

Example 1 — Insurance upfront + trail

Annual premium: $1,200
Upfront commission: 20% of first-year premium
Trail commission: 10% of each renewal premium

Calculation:

Upfront at placement = 20% × $1,200 = $140
Trail if renewed = 10% × $1,200 = $120 per renewal year

Example 2 — Mortgage broker split (upfront + trail)

Loan amount: $100,000
Lender pays upfront 0.6% and trail 0.2% p.a. on outstanding balance

Calculation:

Upfront = 0.6% × $100,000 = $1,400 (paid at settlement)
Year 1 trail (approx) = 0.2% × $100,000 = $100; trail reduces as the balance is repaid

Example 3 — Flat referral fee

Platform pays a $150 flat fee per successful lead. If the referral converts, the referrer receives $150 regardless of product value.

Simple formulas:

Upfront = upfront rate × value
Trail (annual) = trail rate × outstanding balance

Why commissions matter — incentives and conflicts of interest

Commissions link remuneration to product distribution and can create incentives that diverge from a client's best interests:

Higher upfront commissions may favour placing one product over a cheaper alternative.
Volume bonuses can prioritise issuer-preferred products.
Trail commissions can incentivise ongoing recommendations even when cheaper options exist.

Understanding commission structures helps consumers spot potential conflicts. Intermediaries must manage and disclose conflicts under regulatory obligations and best-practice policies such as a formal conflict of interest policy.

Disclosure and regulatory obligations

Regulatory frameworks require transparent disclosure and, in some cases, client consent. Key obligations:

ASIC — Informed consent for insurance commissions: Where an intermediary receives a monetary benefit that could reasonably be expected to influence advice, informed consent may be required. ASIC's guidance explains what must be disclosed (the nature, amount or method of calculation, and whether the benefit will continue) and when consent is necessary. See ASIC guidance: https://www.asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/faqs-informed-consents-for-insurance-commissions/

Financial adviser disclosure rules: Advisers must disclose monetary benefits, including commissions and referral fees, and provide fee-for-service alternatives where appropriate. See ASIC regulatory resources: https://www.asic.gov.au

Record-keeping: Intermediaries must keep records of disclosures, consent forms, calculations and communications for compliance and audit. Many firms retain records for around 7 years in line with conservative practice and regulatory guidance.

Clawback and remediation obligations: Inadequate disclosure or lack of consent can lead to enforcement, remediation and penalties. ASIC has acted where disclosure or consent has been inadequate.

Taxation: Commissions received by intermediaries are generally assessable income. For tax treatment and GST implications, see ATO guidance: https://www.ato.gov.au

Industry bodies such as MFAA and NIBA provide practitioner guidance on disclosure wording and best practice:

MFAA: https://www.mfaa.com.au
NIBA: https://niba.com.au

What consumers should ask and look for

Ask these clear questions when getting advice or buying a product:

What commission or monetary benefit will you receive for placing this product? (ask for percentages and flat amounts)
Is the commission upfront, ongoing (trail) or both? Ask for estimated dollar amounts.
Are there volume bonuses or incentives that might affect the recommendation?
Is there a clawback? What events trigger it and how much would be repayable?
Can I receive the same product without paying commission (fee-for-service)? Ask for alternatives and written terms.
Can you provide the disclosure in writing and record my informed consent?

Save written disclosure. Compare total cost and service rather than headline premiums — commission can affect recommendation even when prices look similar.

What intermediaries need to do

Practical steps for intermediaries to manage commissions transparently:

Provide clear, plain-language disclosure of the type and quantum of monetary benefits before obtaining consent. Example wording: "We receive an upfront commission of up to 20% of your first-year premium and a trail commission of up to 10% of each renewal premium from [Insurer]." (Seek legal/compliance review before adopting templates.)
Obtain and record informed consent where required, including date/time and a file note. Use a signed consent form or an electronic audit trail.
Keep robust records: calculations, emails, disclosure copies, remuneration schedules and clawback arrangements. Retain records per regulatory guidance.
Manage conflicts: maintain a conflict of interest policy and consider fee-for-service alternatives to reduce reliance on commissions.
Re-disclose during renewals and variations any ongoing trail arrangements or changes to remuneration.
If you receive volume-based incentives, document thresholds and consider whether they need to be disclosed to affected clients.

Intermediaries placing asset finance should also reference product-read materials to explain how different structures affect remuneration.

Examples & scenarios

Scenario 1 — Insurance purchase Business liability premium: $1,000. Broker discloses upfront commission 18% ($100) and trail 6% ($100 p.a.). Broker explains the clawback: if you cancel within 12 months the broker repays a prorated portion of the $100. You receive written disclosure and sign informed consent.

Scenario 2 — Mortgage broker placement Loan: $100,000. Lender pays 0.5% upfront ($1,500) and 0.15% trail ($150 in year one). Broker offers a fee-for-service option (a $1,000 flat adviser fee), records your choice and retains disclosure files for audit.

These scenarios show the flow of funds, the option between commission and fee-based approaches, and the importance of documented consent.

FAQ

What is the difference between upfront and trail commission?

Upfront commission is paid at placement; trail commission is ongoing and paid during renewals or for the life of the product.

Do I have to pay commission directly?

Usually no. Commissions are paid by the product issuer out of the product's revenue. But understand how commission affects price and the advice you receive.

Can a broker receive commissions and still act in my best interests?

Yes, but potential conflicts exist. Proper disclosure, documented informed consent and professional obligations are intended to manage that risk.

What information must be disclosed before I give consent?

The nature of the benefit, how it is calculated (percentages or flat amounts), whether it is ongoing, who pays it, and any related incentives or bonuses. See ASIC's informed consent guidance: https://www.asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/faqs-informed-consents-for-insurance-commissions/

Can I refuse a commission and negotiate a fee instead?

Often yes. Some intermediaries offer fee-for-service alternatives. Ask for written terms.

What is a commission clawback and when does it apply?

A clawback is a repayment obligation where an issuer seeks repayment of commission if the product is cancelled or certain conditions are not met within a specified period.

Are commissions taxed?

Commission income is generally assessable. Refer to ATO guidance for treatment and GST implications: https://www.ato.gov.au

Key takeaways

Commissions are a common form of remuneration that create incentives; know the structure (upfront, trail, flat, bonuses, clawbacks). Ask for clear, written disclosure and, where required, documented informed consent. Consider fee-for-service alternatives and compare total cost and service, not just headline price.