Clawbacks have been an industry bugbear ever since they were brought in, but the issue has been escalating recently as the sums of money on offer hit new highs amid a refinancing boom. Kate Aubrey explores the clawback issue
The year 2022 was full of new records. Record levels of home buying activity started the year off amid record-low interest rates were keeping brokers busy at the beginning of the year. Broker market share hit a new record, surpassing 70 per cent for the first time, according to the Mortgage and Finance Association of Australia (MFAA). And record-high cashback offers flooded the market, with some lenders offering up to $10,000 to borrowers.
But while brokers are invaluable to borrowers, their actual value is being eroded as clawbacks mount. As new records are set this year as refinancing activity continues, the issue of clawback is taking some brokers to breaking point. The time, dedication, and cost of a broker are being challenged.
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Things have been coming to a peak ever amid persistently high inflation (7.3 per cent for the year ended November). The Reserve Bank of Australia (RBA) responded last with eight consecutive interest rate hikes, lifting the cash rate 300 bps over the year to 3.1 per cent.
The increase in the cash rate has left many mortgage holders paying more than $1,000/month, in some cases on a $500,000 loan.
Thus, it’s little wonder borrowers have been left scrambling for refinancing options. The Australian Bureau of Statistics (ABS) recently reported that the value of owner-occupier refinancing between lenders rose 9.1 per cent to a new record high of $13.4 billion in November (seasonally adjusted).
As interest rates are expected to continue their upward trend — nearing 4 per cent — the issue of clawbacks is expected to continue.
What’s the deal with clawbacks?
Clawbacks were put in place after exit fees were abolished in 2010. They were introduced to ensure that the banks could recoup the costs of entering into a credit contract if it was externally refinanced, with a secondary reasoning that it would reduce the likelihood of brokers churning loans in order to gain a new upfront commission.
Currently, many banks have clawback arrangements with aggregators, which in turn have arrangements with brokers (though several non-banks have a no clawback policy, such as La Trobe Financial and Funding.com.au).
Clawback arrangements allow the credit provider to recover some or all of the commission paid by the lender to the aggregator if the loan does not continue beyond a minimum ‘clawback period’.
While the Finance Brokers Association of Australia (FBAA) and the Mortgage & Finance Association of Australia (MFAA) argued strongly for clawbacks to be removed entirely during the banking royal commission, the outcome saw the government reduce the maximum clawback period to two years.
The regulations ban clawback arrangements if they are in place for more than two years from the beginning of the credit contract. For consumer arrangements, this period begins on day one when credit is first drawn down and for refinancing credit, it applies the first day after the refinanced credit is made available.
But the regulation states “the consumer must not be subject to an obligation to pay an amount as a result of an amount being required to be repaid under the repayment obligation”. While this protects the consumer from additional charges when changing loans within a clawback period, it means that brokers have to bear the brunt of the clawback costs.
What’s the issue?
Most brokers agree that clawbacks are fair enough if a loan is lost due to something the broker did, but it’s universally acknowledged that it isn’t fair when a loan is lost as a result of a change in circumstances.
The big ones that top many brokers list is if a borrower breaks their loan due to the three Ds: divorce, disputes, and death.
For example, broker Gary Eckel from CommRural Lending told The Adviser that he had arranged a $2 million commercial loan for a client who passed away within 12 months of the deal. This resulted in the security being sold and the loan being paid out.
“We spent a lot of time and effort to arrange the loan and the bank clawed back 100 per cent of the commission,” he told The Adviser.
“… We were charged an application fee of 0.5 per cent as well as normal ongoing admin charges. We ended up with nothing.
“Surely that is unfair. Why should we be penalised?”
The cashback conundrum
Broker Peter Tersteeg at Sage Lending said he could “appreciate the various reasons lenders have clawbacks” but added that lenders lose their agency when they offer cashbacks.
As interest rates increase, lenders are continuing to attempt to sweeten the deal by offering new clients cashback offers and other incentives. In some cases, lenders have been offering cashback incentives up to $10,000.
According to Mr Tersteeg, any lender that offers cashback incentives to borrowers of any kind “forgoes the right to charge clawbacks to brokers”.
“There’s even a reasonable argument that brokers’ clawback is covering much of the cost of the cashback,” Mr Tersteeg said.
He said that while lenders make the argument that cashback offers to cover the cost of refinancing, that usually only costs about $700 –$1,000, while cashback offers range between $2,000 –$6,000.
“Lenders have obviously done the research to know that borrower apathy on expensive loans will outweigh the costs of the cashback offer overall,” Mr Tersteeg said.
“A fairer and more honest approach would be for lenders to only offer cashback on the actual cost of moving lenders. This removes the cost barrier to people switching lenders.”
Ryan Gair, the chief executive at mortgage manager RateMoney, said lenders are effectively “buying business” with cashback offers, which were not only “hurting” the industry but also creating a “false economy” and adding towards inflation.
“If you’ve got banks and lenders saying here’s $5,000 in your account, [borrowers are] going to go and spend it,” Mr Gair said.
“We have a spending problem here in Australia and we have an inflation problem.”
Mr Gair said a better solution would be to have incentives for loyal customers rather than upfront cashback offers or, at the very least, there should be caps on the amount of cashback offers available.
Call for action
As clawbacks and cashbacks are becoming an increasing problem for the industry, associations have ramped up their lobbying to push for industry changes.
Indeed, data from the FBAA has found that lender cashback incentives rose by 59.1 per cent between 2018–21 and has been escalating recently, too.
It has found that the average annual clawback value per annum to a broker had surged by 47.4 per cent over three years, from $10,229 in 2018 to $15,077 in 2021, putting pressure on the government to act.
Given the clawback arrangement is a commercial agreement, the government would not usually get involved unless a due cause can be proven.
As such, the managing director of the FBAA, Peter White, said the association would continue to focus on providing all necessary information to the government to see the “unfair practice” extinguished from [the] industry.
“We need to provide further details on all this so that the government of today is in a position to intervene … this is what we at the FBAA are doing at this moment,” he said.
The BID question
Given the increase in regulation that has been placed on the broking industry since the royal commission — including the best interests duty — many believe that clawbacks are in dire need of overhaul.
Cory Bannister, chief lending officer and senior vice-president at La Trobe Financial, said last year: “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.”
Aggregator Finsure has also declared commission clawbacks as “unjustified”, with CEO Simon Bednar stating last year that clawback “is at odds with the Best Interests Duty”.
“Brokers do the work and if they carry out their obligation under BID they should be rewarded, not penalised,” Mr Bednar said.
While brokers are governed under best interests duty, lenders are able to “ruthlessly steer” borrowers to them through cash incentives, the FBAA’s Mr White told The Adviser.
Mr White explained a new borrower can be offered a $6,000–$10,000 in a cashback offer and if that loan terminates early, there is no clawback to the customer, plus there is not believed to be any recourse to the loans officer or branch itself for losing the loan.
But, if a broker client moves lender for cashback, it’s the broker who loses out.
“Today we have an environment whereby the majority of lending banks’ profit comes from brokers, who do a significant amount of the work for the lender,” Mr White said.
“Simply speaking it is unfair, it is uncommercial, it is inappropriate, it is anti-competitive, and much more.
“In the decade since clawbacks were first introduced, the meaning of ‘churn’ has been lost and morphed into something it was never about.
“Churn was always about moving ‘portfolios’, [such as] $50–100 million in borrowing value through many, many borrowers. It was never about moving one or two loans ... and especially in the light of today where we, as an industry, are governed by a Best Interests Duty obligation.”
The CEO of the MFAA, Anja Pannek, has also said that a “constructive conversation” on clawbacks in this industry was needed.
“I’ve heard it for a number of years around clawbacks — ‘let’s cancel clawbacks’. I think that’s a pretty simplistic approach for what can lead to some pretty challenging circumstances for brokers overall,” she said.
“Clawbacks are, and they’ve always been, a really important control mechanism when it comes to how brokers originate loans for their customers.”
But she added that there’s a convergence between cashback and clawbacks and thus an opportunity for the association to gain a deeper understanding on how they’re structured, where best interests duty comes in, and what’s the right thing to do for the industry.
“That’s the conversation I’m keen to have with the industry, and as and when appropriate with regulators as well for seeing patterns,” Ms Pannek said.
Some lenders have already begun amending their clawback structure, such as the in-house lending division of AFG, which changed its clawback structure so that full clawback only lasts for three months after the loan had settled, followed by a monthly, proportionate step-down for the remaining 21 months.
The economics of clawbacks
The Labor government has pledged its commitment to the issue of clawbacks and “want[s] to ensure that brokers are able to make a fair profit for the work that they perform”.
Speaking last year, the Financial Services Minister and Assistant Treasurer, Stephen Jones MP, told brokers: “I understand that it takes a lot of effort, a lot of work, a lot of hours in establishing a loan. And if one of your clients moves their mortgage from one bank to another within two years, the bank is automatically clawing back — sometimes the majority of a commission payment.
“That means mortgage brokers bear the cost.”
As such, he revealed that he was “interested in whether the money that has been clawbacked is greater than the bank’s cost in establishing the loan in the first place”, calling for evidence on the economics of clawbacks.
Mr White reiterated the association would continue to research the matter and provide as much information to the government to encourage their support in eradicating the scheme.
What’s the solution?
While there are some concerns that lenders would simply reduce upfront commissions if clawbacks were done away with completely (in order to balance costs), a plethora of solutions are being offered up by brokers to at least make clawbacks more equitable for the broker channel.
Derek Mcleod at Mortgage Choice Carindale said it was difficult to accept “that any clawback is fair and reasonable”, until such time as lenders offer more balanced policies.
He suggested that lenders should waive clawbacks if a loan closes as the result of the sale of a property or in the event of the separation of the borrowers, apply a month-by-month reduction in the clawback rate, and waive clawbacks when they have not notified the broker of the receipt of a discharge request (as AMP and Macquarie currently do).
He suggested this would allow brokers “to do our own business retention” and right the “greatest injustice”.
“I’ve been complaining about this to BDMs for nearly 20 years, but they usually reply that it can’t be done as it is a privacy issue. That is, of course, a nonsense, given that lenders notify us of the progress of an application in the first instance, provide us with a monthly outstanding loan balance (i.e. in an end-of-month trail report) after settlement, and alert us when a loan closes,” he explained.
“At the point of application, a client signs an authority allowing a lender to communicate with the originator about the client, but with a few exceptions, they do not alert us to the receipt of a discharge request. If they did, we could potentially work with the client and the lender’s business retention teams before it is too late.”
Mr Mcleod said upon following up with the clients on loans closed due to refinance, in most cases, the deal was not necessarily a better outcome.
“In such cases, in terms of lost future income, the aggregator loses, the outgoing bank loses, and of course the originating broker loses — more so if they also cop a clawback,” Mr Mcleod said.
“The only winners are the new bank and broker.”
Broker, Matt Turner, at GSC Finance Solutions added that cashbacks were a “great hook” to get clients to think about refinancing when turnarounds were bad, however, now there seems to be no real purpose to them.
“It is great that the client gets their costs of refinancing covered by the cashback however they shouldn’t profit from them at all,” Mr Turner said.
“Right now we can lose 100 per cent of our income and not have our costs covered.
“I would like to see reform on clawback to be amortised over the two years of the loan, so if a client does discharge, we at least get paid something for the work we do.”
Kirsty Dunphey, co-founder at Up Loans, suggested switching to a fair sliding scale would be great, praising the work that the FBAA and MFAA had been undertaking on this.
“I’d also love to see the cashback frenzy go away, or for there to be a clawback on that to clients if they leave that lender within two years,” Ms Dunphey said.
“But I would love to see a lender out there offering a cashback that simply covers costs in moving on smaller loans under $250,000.”
[Related: Do banks profit from clawback? Assistant Treasurer asks]
