The head of a major aggregator has said he will lobby for changes to “unfair” clawback arrangements, adding that there is “justification” for reform amid recent changes to broker remuneration.
Mark Haron, executive director of Connective and director of the Mortgage & Finance Association of Australia (MFAA)
In September, the Morrison government introduced the National Consumer Credit Protection Amentment (Mortgage Brokers) Bill 2019 for consultation – containing a new best interests duty obligation on mortgage brokers, as recommended by commissioner Kenneth Hayne in the final report of the banking royal commission.
Among the bill’s proposed measures is a move to limit the period in which commissions can be clawed back from aggregators and mortgage brokers to two years. The bill would also prohibit the cost of clawbacks being passed on to consumers.
However, during a webinar hosted by mortgage aggregator Connective, director Mark Haron revealed that he would use the consultation process – which concludes on 4 October – to fight for amendments to the proposed measure.
Mr Haron said that existing arrangements are “unfair”, particularly in light of recent remuneration reforms that restrict the payment of upfront commissions to the loan amount drawn down by a borrower (rather than approved).
“We think clawbacks in [the current form] are unfair on brokers, so this is the part that we need to put forward to both government and Treasury and, if necessary, [to] the Senate,” he said.
The head of the major aggregator proposed that upfront commissions only be clawed back when brokers are the cause of the termination of a credit contract with a lender.
“Clawbacks need to be structured in a fairer way,” he said.
“Our stance will be that, if a clawback is occurring because of something a broker has done and an outcome of something the broker has done, [then] that clawback can come to the broker.
“If it’s not that case, if it’s a case where it’s something that the bank has done [or] the customer has done that no one was aware of except for the customer, then why should the broker be wearing that cost?”
Mr Haron acknowledged that clawbacks are designed to recover losses incurred by lenders if they no longer receive commercial benefit from a broker-originated loan, adding that credit providers may consider reducing the rate of upfront commissions if such arrangements were no longer in place.
However, Connective’s director noted that changes to clawback arrangements would be justifiable, with the value of upfront commissions payable to brokers declining as a result of the Combined Industry Forum’s (CIF) implementation of the “net of offset” provision.
“Given that [lenders] are not paying out as much commission as they had been in the past, [there’s] a justification that [clawback reforms] could be a way of offsetting some of the non-payment [or] reduction of upfront commissions,” he said.
“That will be something we’ll be working on from a Connective point of view.
“[We will] discuss that with government and legislators to ensure it’s done in a fair and equitable way and it’s not hurting small businesses, but at the same time not hurting the customers as well.”
Mr Haron is the latest broking industry stakeholder to express support for clawback reform, with Mortgage Choice CEO Susan Mitchell previously expressing support for an alternative model.
Ms Mitchell stated that, while she believes the industry is “stuck” with clawbacks, the model could be reformed to ensure that lenders bear a larger portion of the loss in the first year of a loan term.
“The idea that you lose 100 per cent of your income on day 10 [of a loan term] and then on day 364 you also lose 100 per cent of your upfront income doesn’t really seem fair,” she said.
“Perhaps a more even sharing of the loss between a bank and the broker over the first year, I think, would be a fairer structure.”
Ms Mitchell noted that for a standard clawback structure, 100 per cent of an upfront commission is clawed back in the first year of a loan term, with the proportion of the clawed-back amount decreasing to approximately 50 per cent over the remainder of the clawback period.
However, the chief executive suggested that the proportion of the commission clawed back “move down to 50 per cent evenly throughout the first year”.
“The bank has paid to acquire an asset and the broker has done work, and both of them have lost out, so a more even share of that would be fairer,” she added.
Both Mr Haron and Ms Mitchell have also previously stated that, if current clawback arrangements remain in place, brokers could consider charging a fee to higher-risk borrowers who may be more likely to default or refinance their loan within the clawback period.
“I think it’s perfectly fine. I think it’s a great idea for brokers to charge a fee upfront for arranging a loan when the intent of the borrower is clear,” she said.
“I’m not talking about someone who changes their mind nine months in [because] their circumstances have changed. That’s what [the royal commission] doesn’t want brokers to charge borrowers for.
“But let’s say you have a customer that buys and fixes up houses and sells them – he’s always going to sell that house within nine months. For someone like that, it’s clear the intention is to sell that house or sell that property, then I think the broker should feel free to charge the person a fee upfront.”
The managing director of the Finance Brokers Association of Australia, Peter White, has also previously backed the implementation of a fairer clawback arrangements.
Like Mr Haron, Mr White has said that he does not believe prospective reforms should penalise brokers for developments that were out of their control.
“When an unforeseeable circumstance occurs (like someone passing away or moving overseas etc.) it’s not that a broker hasn’t done their job,” he said.
“They’ve done their job – it was elements out of their control that saw the loan repaid. And this is where best interests [duty] is going to have an interesting part to play.
“I believe that, if you have done your job, you should get paid for doing your job. And if you are acting in the best interests of your client, you shouldn’t have anything that impedes you from that judgement – but potentially a clawback might.”
The consultation period for the federal government’s proposed reforms is currently open, with the new provisions scheduled for implementation by 1 July 2020.