The in-house lending division of AFG has amended its clawback structure so that full clawback only lasts for three months, stepping down over the remaining 21 months.
Aggregation group Australian Finance Group (AFG) has announced that it has changed its clawback structure for its own lending products funded by AFG Securities.
It will limit 100 per cent commission clawback to the first three months after the loan has settled, followed by a monthly, proportionate step-down for the remaining 21 months.
The new structure will come into effect for new AFG Retro and AFG Link loans settled from 15 September 2020.
For loans settled before 15 September, the previous upfront clawback thresholds for AFG Retro and AFG Link will remain as 100 per cent clawback up to 12 months and 50 per cent from 12 to 18 months.
The change was announced during an AFG webinar on Monday (14 September), during which it was outlined that current clawback ‘cliffs’ are “arbitrary and need to change” and clawbacks should diminish proportionately in the same way as lenders recover their costs over time.
However, the group outlined that “there still should be recognition that a loan that discharges very shortly after settlement is, arguably, a poor transaction for all concerned”.
Speaking of the decision to change the clawback structure, AFG Securities’ general manager, Damian Percy, commented: “AFG Securities has been looking to find a fairer clawback model that better balances the interests of brokers and lenders for some time.
“Lenders will assert that upfront commissions should reflect the value that the broker delivers and must necessarily recognise that a loan that only lasts a year or two is, at best, a break-even proposition for the lender.
“In contrast, brokers can reasonably argue that the arbitrary clawback ‘cliffs’ that exist today simply don’t reflect the fact that as time goes on, the lender’s position improves.
“And there’s the reasonable question as to whether the prevailing structure is supportive of what the new mortgage broker best interests duty is seeking to achieve.”
Mr Percy acknowledged that “no clawback regime is perfect”, but added that AFG Securities believes its change in clawback structure reflects an appropriate and fair balance.
“The step-down approach is, we believe, simple, reasonable and supports our brokers to meet their best interests duty,” he said.
“I hope other lenders will, in due course, recognise that the industry’s approach today needs work and follow suit,” he concluded.
While the industry prepares for changes to clawback arrangements coming into effect on 1 January 2021, the broking industry has long been calling for amendments to be made to clawback commissions, particularly for loans that are refinanced/paid off for reasons outside of the control of brokers.
Speaking last month, AFG’s general manager of industry and partnership development and co-chair of the Combined Industry Forum (CIF), Mark Hewitt, revealed that a working group has been set up to review current clawback arrangements in the mortgage broking industry, with a recommendation due “by the end of the year”.
Mr Hewitt said the working group has been tasked with addressing potential impediments to compliance with the upcoming best interests duty.
“The CIF still believes that clawbacks are an important part of the overall remuneration structure, and that’s certainly a belief supported by regulators,” he said last month.
“However, the potential for conflict with the broker best interests duty is amplified due to the blunt nature with which they tend to be applied.
“The working group has been charged with examining this and looking at possible structural changes, with a view of reducing the potential for conflict.”
[Related: Clawback arrangements under review]
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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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