Industry united in push for clawback overhaul

In both its draft bill and its final bill tabled in Parliament last week, the government has proposed that the clawback period for broker commissions be set to a maximum of two years and has prohibited brokers from passing on such costs to clients.

This has raised concern among broking industry stakeholders, who have questioned whether the provisions align with the proposed best interests duty.   

MFAA

In its submission, the MFAA noted that most lender clawback arrangements are structured to claw back 100 per cent of a broker’s upfront commission if a loan is refinanced in year one, and 50 per cent in the second year.

According to the MFAA, such arrangements may conflict with the best interests duty obligation, which may force brokers to switch a client’s product within the clawback period to secure an alternative product that is deemed by law to be in the borrower’s best interests.

“In the event a broker is forced to refinance the consumer with a different lender within 12 months, the broker will usually face a 100 per cent clawback of upfront commission earned with a very real risk for successive 12-month clawbacks going forward,” the MFAA stated.

“This inherent conflict between the best interests duty and the current clawback structure and the associated risks it poses to churn could be costly to the entire industry and challenge the viability of some broker businesses and clearly needs to be addressed.”

To resolve this, the MFAA has recommended that consideration be given to providing guidance on a “materiality threshold” with regards to the application of a best interests duty at the time of any periodic review of a home loan.

In addition, the MFAA has recommended that the maximum clawback period be reduced to 12 months, and that the clawback percentage “steps down in a more linear manner”, from 100 to zero per cent over the clawback period rather than the current “all or nothing” approach, which it said is “inequitable”.

FBAA

The FBAA echoed the MFAA’s sentiment in its submission.

The association said that its first preference is for “clawbacks to be abolished”, which it maintains is the “most appropriate way forward”.

However, short of this, the FBAA has echoed the MFAA’s call for the clawback period to be reduced to 12 months.

“This would align with annual reviews for brokers that adopt a practice of regularly reviewing their clients’ circumstances,” the FBAA stated.

The FBAA also raised concerns over proposed regulations to prohibit brokers from passing on clawbacks to customers.

“Whilst not a common practice, some brokers defer charging fees for service but reserve the right to charge fees for service if the consumer does anything to trigger the clawback,” the association noted.

“We see no reason this practice should not be allowed to continue.”

The FBAA concluded by noting that the proposed clawback provisions “unfairly target brokers”, particularly given that lenders:

• do not regularly review existing clients and recognise that consumer apathy leads to high retention rates – notwithstanding unfavourable changes to terms and conditions, fees and rates; and
• would be under no obligation to consider competitor products or consider whether telling a consumer to remain in their existing product is in their best interests or not.

Aggregators

The Australian Finance Group, Connective, Loan Market and Mortgage Choice have also renewed their calls for clawback reforms in their submissions to Treasury.

Loan Market – which noted that more than 6.6 per cent of its income is clawed back annually – also suggested that consideration be given to either limiting the clawback period to 100 per cent within 12 months of settlement or amortising clawbacks on a monthly basis over a two-year period.

“We believe that this provides the necessary balance for a mortgage broker to ensure the recommendation is in the client’s best interest,” Loan Market stated.

Connective agreed, adding: “An option would be to legislate the clawback percentage step-down in a more linear manner over the clawback period. 

“Ideally, this step-down would be calculated daily (or monthly if not possible) from 100 to zero per cent over the applicable clawback period.”

Mortgage Choice has called for a combination of the above – reducing the clawback period to 12 months, during which it would be amortised.

“One year would be more in keeping with the [best interests duty],” Mortgage Choice submitted.

Meanwhile, AFG has proposed that rather than amending the bill, the Australian Securities and Investments Commission (ASIC) could specify in its regulatory guidance that clawbacks be on a “sliding scale”, decreasing over the clawback period.

More guidance around how the best interests duty applies in practice is expected to be released by ASIC before the end of the year, which stakeholders have said would be “almost as crucial as what’s in the legislation”.

[Related: Advisers slam ‘totally impractical’ reform agenda]