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‘Clawback should be abandoned’: Former ASIC deputy chair

by Annie Kane6 minute read

With the best interests duty now in place, clawback “should be abandoned”, Daniel Crennan QC, the former deputy chair of the financial services regulator has said.

The former deputy chair of the Australian Securities & Investments Commission (ASIC), Daniel Crennan QC, has revealed that he does not believe clawback should remain in place now that mortgage brokers have a best interests duty obligation in place.

Speaking at Finsure’s 2022 Commercial & Diversified Finance Summit in Sydney on Wednesday (25 May), Mr Crennan suggested that the new obligation has – in effect – made previous regimes that seek to address misconduct redundant.

Mr Crennan flagged recent comments made by Finsure chief executive Simon Bednar around clawback, which proposed that there was no further utility effectively in clawback relief given the introduction of the best interests duty. 

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He commented: “Mr Bednar – with support from others in the industry, I should say – argued that ‘brokers do the work and if they carry out their obligations under the best interest duties or BID, they should be rewarded and not penalised’.

“Now, this is my view, (for what it’s worth): that argument has some attraction in a principles-based regulatory system. Principles-based regulation, just as an aside, is a very important movement internationally. And its intended to simplify regulation and also to improve the conduct of those that participate in the financial system. Some of the key benefits and purposes of principles-based regulation is that it removes the need for prescriptive regulation. In other words, a long list of things that you cant do or should do, and diminishes the need for multiplicity of safeguards and regulatory responses, which is very problematic for the United States. 

“Furthermore, if (as the language of ASIC regulatory guide 273 certainly seems to suggest) the Best Interests Duty is designed to be a universal panacea for potential misconduct in the mortgage broking industry. 

“Therefore, in my view, at least, competing regimes for addressing misconduct are arguably no longer fit for purpose and – including clawback – should be abandoned.” 

Mr Crennan later told brokers that he believed that the “abolition of clawback in the face of the Best Interests Duty, which is a civil penalty procedure, is perfectly logical”.

The former deputy chair (currently principal consultant at Credi Consulting) was cheered by brokers in the room for this position.

The industry has recently been raising the issue of the unfair nature of clawback commissions given the introduction of BID and a strong refinancing market, which has led to a surge in clawbacks.

Indeed, the Finance Brokers Association of Australia has recently flagged that it is working on tackling clawbacks and found that the practice of pulling back commissions for work done increased by 30 per cent over the last three years – 60 per cent of which were caused by lender cashback offers.

The Australian Labor Party (ALP) has recently said it would be open to discussing clawback arrangements with the broking industry – with (the former shadow) financial services minister Stephen Jones MP telling viewers of an FBAA webcast that he would be willing to review the matter if the party gained power in the 2022 federal election.

With the ALP now having won the election, many leaders in the broker space have said that they are hopeful that the ALP will stand by this commitment.

Background to RG 273

The financial services regulator published Regulatory Guide 273 Mortgage brokers: Best interests duty (RG 273) in 2020 to assist in the application of the new best interests duty (BID) for mortgage brokers, which took effect in January 2021.

ASIC’s high-level, principles-based guidance seeks to outline obligations under the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers [2019 Measures]) Bill 2019 and does not prescribe minimum standards of conduct nor impose new or additional obligations.

The guidance contains ASIC’s views on how mortgage brokers may comply with their obligations at “key stages” of the credit assistance process, including:

  • The effect of the range of credit providers and products brokers can access
  • Recommending packages of credit products
  • The types of records that may be kept to demonstrate compliance

Specifically, the guidance states that ASIC expects brokers to:

  • Assess what product(s) and what credit assistance would be in each consumer’s best interests
  • Exercise their judgement when determining what is in the consumer’s best interests, adding that in some situations, this would include “challenging the consumer’s perception of their best interests”
  • Consider the product holistically and weighing up the relevant factors based on the value and benefits they offer that consumer
  • Present consumers with more than one option, adding that where there are multiple options for a consumer to consider, they should be presented in a manner consistent with the consumer’s best interests
  • Hold evidence of compliance with the best interests obligations – predominantly from the broker’s records – to help demonstrate compliance and help credit licensees “take reasonable steps” to ensure credit representatives comply with these obligations.

[Related: Labor open to discussing clawback]

daniel crennan qc speaking ta

Annie Kane

Annie Kane

AUTHOR

Annie Kane is the editor of The Adviser and Mortgage Business.

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