Borrower fee flagged as option to mitigate clawback risks

In the final report of the banking royal commission, commissioner Kenneth Hayne recommended that clawbacks not be passed on to borrowers if upfront and/or trailing commissions remained part of the broker remuneration model.

“I note, and if commission payments were to remain, I would support, the recommendation made by the Productivity Commission to prohibit commission clawbacks from being passed on to borrowers,” Commissioner Hayne said.

Commissioner Hayne’s recommendation is now in the implementation process, with commission-based remuneration set to remain in place for at least the next three years.

Therefore, Mr Haron has encouraged brokers to consider offsetting such revenue losses by charging a fee to borrowers that are deemed more likely to default or refinance their loan within the clawback period. 

“We completely understand that sometimes brokers feel hard done by when a customer does a backflip on something and then all of the sudden, they’re getting clawed back on it,” he said.

“Moving forward and tackling this one from a broker perspective, there’s a couple of things [brokers] should do.”

Mr Haron continued: “First of all, really understanding the customer’s position and trying to ascertain that they are going to be needing that loan and not going to be changing that loan within a two-year period. 

“If they are, then you may have to consider charging them a fee to balance out the cost of what you’ll have to get clawed back on.”

The Connective director said that the fee could be “deferred” or “refundable”, with borrowers receiving a rebate once the clawback period has passed.

Mr Haron added that the aggregator would be working with lenders to ensure that clawback arrangements are “fair and reasonable”.

The managing director of the Finance Brokers Association of Australia (FBAA), Peter White, recently told The Adviser that he would be closely monitoring developments in the implementation of clawback  reforms.

Mr White said that he wanted to ensure that the incoming requirements did not penalise brokers for things that were out of their control.

“When an unforeseeable circumstance occurs (like someone passing away or moving overseas, etc.) it’s not that a broker hasn’t done their job,” he said.

“They’ve done their job – it was elements out of their control that saw the loan repaid. And this is where best interests [duty] is going to have an interesting part to play.

“I believe that, if you have done your job, you should get paid for doing your job. And if you are acting in the best interests of your client, you shouldn’t have anything that impedes you from that judgement – but potentially a clawback might.”

[Related: ‘Now is not the time to rest on our laurels’, say association heads]