Mortgage brokers will get to keep their fees but they will be capped at 1.1 per cent of the property loan, if Labor wins the next federal election.
Victims of the big banks could also potentially claw back greater compensation payments than the coalition's proposed scheme, if Labor wins.
"Commissions can stay, but they will be flat and they'll be consistent across the board," shadow treasurer Chris Bowen said on Friday when announcing Labor's response to the banking royal commission.
Commissioner Kenneth Hayne recommended banning trailing commissions for mortgage brokers, and replacing them with user-pays upfront fees.
The coalition will ban trailing commissions and review the upfront fee proposal, after concerns the royal commission's plans would destroy thousands of small businesses.
Labor is proposing a flat commission rate of 1.1 per cent of the loan - but it would only apply to the amount that was actually drawn down.
If a customer got a bigger mortgage than was necessary for a property, the broker would only get the commission on the cash needed to buy it.
The flat fee structure of 1.1 per cent also means banks cannot offer higher fees to brokers to give them an incentive to sell their mortgages.
Treasurer Josh Frydenberg says the coalition is already banning grandfathered conflicted remuneration and trailing commissions from January 1, 2021.
"The government's actions ensure that it is consumers, not industry, that benefit from the end of grandfathering of conflicted remuneration," Mr Frydenberg said.
Finance Brokers Association of Australia managing director Peter White said the announcement provides some much-needed clarity for brokers.
"(It's) positive but there needs to be more work done around clawbacks," he said.
Labor has also pledged to raise the threshold for compensation that banking victims negotiate through the Australian Financial Complaints Authority.
The party plans to lift it to $2 million, up from the current caps of $500,000 for individuals and $1 million for small businesses.
Labor would also lift the value of eligible claims from $1 million to $2 million.
But Mr Frydenberg warned the 35,000 small businesses in AFCA could be put out of business because of the plan.
"This will impose a retrospective burden on many small financial businesses that had nothing to do with the misconduct," he said.
Under Labor's plan, non-financial losses would be put on the same footing as financial losses and eligible for $2 million compensation, up from $5000.
Australians who were knocked back for compensation since 2008 will be allowed to argue their case a second time.
The plan comes after the coalition promised to allow AFCA to award compensation for successful claims going back 10 years, and set up a compensation scheme of last resort.
Australian Associated Press