Clawbacks clash with best interests duty: Finsure

According to Mr Bednar, clawbacks are a repackaged version of mortgage exit fees, which charged borrowers for exiting the loan within two years and were banned by the government in 2011.

“Clawback is at odds with BID,” he said.

“There needs to be a discussion about the relevance of clawbacks given both the MFAA [Mortgage and Finance Brokers Association of Australia] and FBAA’s [Finance and Broking Association of Australia] own data has confirmed an average loan length of more than four years, a statistic which is backed by Finsure’s own portfolio data.

“Why is then clawback even relevant when the average life of a loan is more than four years?”

The FBAA has recently flagged that it is working on tackling clawbacks.

Research from the industry body has shown that clawbacks have increased by 30 per cent over the last three years – 60 per cent of which were caused by lender cashback offers.

“Brokers do the work and if they carry out their obligation under BID they should be rewarded, not penalised,” Mr Bednar said.

Cory Bannister, chief lending officer and senior vice-president at La Trobe Financial, which does not have a clawback policy, echoed Mr Bednar, commenting: “If a broker has completed the work to assist both their client and the lender, to appropriately review, assess and recommend a loan that is subsequently settled, they should be paid.

“The protection for lenders against ‘unnecessary churn’ or ‘gaming’ to generate additional commission is the BID legislation.”

Instead, the Finsure CEO has proposed the industry should pivot to using data for the way. In this scenario, the lending industry could reward good broker behaviour and determine if brokers are serial offenders, that tend to refinance in less than two years into the life of a loan.

“Brokers with portfolios that perform and don’t incur excess churn should be rewarded and this can be demonstrated through data. Data doesn’t lie,” Mr Bednar said.

“I want to see an industry which supports brokers through the use of aggregator and lender data in a mature way and encourage industry discussion to achieve a way forward.”

Brokers have recently also expressed alarm at a rise in discounted interest rates and cashback incentives to retain clients on the verge of refinancing – sometimes at the detriment of the customer.

The MFAA has engaged with Treasury over the issue of retention teams undercutting offers at the last minute.

Meanwhile FBAA managing director Peter White called the practice “dirty underhanded grubby tactics to try and retain borrowers when [a lender has] already lost them”.

He added the cashback offers in these situations are driving churn in the marketplace, resulting in increased clawbacks for brokers.

FBAA research in December had also found that the vast majority (94 per cent) of customers are unconcerned with broker remuneration.

[Related: How the broking industry could benefit from CDR data]