The federal government has ditched a key recommendation from the banking royal commission to scrap trail commissions for new loans arranged by mortgage brokers after pressure from the industry and smaller lenders.

The mortgage broker industry, which had warned that many brokers would go out of business if the Hayne recommendation was approved, cheered Treasurer Josh Frydenberg's announcement on Tuesday that the government would now review trail commissions in three years if it remains in government.

Federal Treasurer Josh Frydenberg has dumped a key recommendation from the Hayne royal commission regarding broker pay. Credit:Rohan Thomson

Commissions paid to mortgage brokers was one of the key focus areas for the royal commission, with commissioner Kenneth Hayne recommending in his final report that commissions to brokers be axed and replaced by an upfront fee.

Mortgage & Finance Association Australia (MFAA) chief executive Mike Felton said the decision showed the case for the removal of mortgage broker trail commissions had not been made.