The head of a major aggregation group has called for more guidance around whether the ban on clawback recoupment will apply to loans lodged before 2021.
Mark Haron, director of Connective, has emphasised that brokers will not be able to recoup the cost of clawback from 1 January 2021 when the best interests duty (BID) comes into effect.
Under part of the new duty, lenders will be able to claw back commissions paid to aggregators and brokers for up to two years. However, under part of yet-to-be-passed draft legislation (which is expected to come into effect on 1 January 2021 once the draft regulations formally pass (no date has yet been set for when this will be))*, aggregators and brokers subject to clawback would be prohibited from recouping the cost from consumers.
This would mean that they will be prohibited from charging their customers for any clawed back commission from 1 January.
While work is still ongoing around clawback arrangements, Mr Haron said that more clarity is needed on whether the prohibition of clawback recoupment applies to broker-lodged loans that include a clawback recoupment clause that are lodged before the 1 January BID implementation date.
Speaking to The Adviser following a Connective webinar on the matter, Mr Haron said that some brokers have asked whether the prohibition on clawback recoupment is retrospective (i.e. whether the rule would apply should their client have agreed to bear the cost of commission clawback for a loan that was lodged before BID applied, which then gets refinanced out after the prohibition comes into effect).
Mr Haron explained: “If a broker does a loan for a customer today (or had done it last month or sometime this year) and within that there is a detail that they would be passing on any clawbacks to them (which is documented properly and the client has signed off on it), how does the ban apply?
“What we want clarity on is about - [Should a] clawback come through on that particular loan past 1 January next year - whether or not they actually can legally pass that clawback or not, given that there is a 1 January best interests duty legislation saying they can't.
“So, we will have to see whether that’s a physical hard base, or whether their [existing] contract [that] enables clawback to be passed on will hold true. So, we want clarity on that.”
Mr Haron added that the BID relates to credit assistance and – as brokers apply the credit assistance at the time of the application (and “that really doesn’t finish until that loan is settled”) – it would therefore seem that the BID would not apply for loans settled before 1 January. However, he added more clarity was needed from the regulators and Treasury on their interpretation of the application of the clawback recoupment prohibition.
As such, he added that conversations are being sought between the broking industry and relevant government agencies to provide further certainty.
Indeed, the broking industry has been united in its push for clawback reform, with several stakeholders, including the Mortgage & Finance Association of Australia (MFAA), the Finance Brokers Association of Australia (FBAA) and a number of aggregators backing changes to the current model.
In its submissions to Treasury following the release of the federal government’s draft best interests duty bill, the MFAA 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”.
The FBAA echoed this sentiment in its submission, stating that while its first preference is for “clawbacks to be abolished”, it would back a move to reduce the clawback period to 12 months.
*This story was updated on 27 August to reflect that the bill outlining the clawback recoupment - National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019, - has not yet been formally passed.
[Related: Clawback arrangements under review]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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