Legislation passed recently seemed to enshrine a philosophy that benefits big banks but has the potential to financially devastate brokers, said Zippy Financial Director and Principal Broker Louisa Sanghera.  

The Best Interests Duty Bill, included in the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019, was passed by both the upper and lower houses and included changes to the Credit Act to require mortgage brokers to act in the best interests of consumers and address conflicted remuneration for mortgage brokers.

This additionally limits to two years the period over which commissions can be clawed back from aggregators and brokers and prohibit the cost of clawbacks being passed on to consumers.

At a Glance:

• The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 has passed both federal houses.
• The Best Interests Duty Bill is included in this bill.
• There will be a limit of two years on which commissions can be clawed back

Clawback is a fee charged by the banks to mortgage brokers for home loans that are prepaid or refinanced within two years of settlement. 

"Under the Best Interests Duty Bill, brokers would be left out of pocket when clients opted to change lenders within the first two years of taking out their loans because of clawbacks," said Ms Sanghera. 

“Of course, we have no control over what clients decide to do once the transaction is completed, yet, we end up essentially working for free if they change lenders or repay their loans within the first year or two. 

“In what other industry is it alright to essentially not get paid for work that you have successfully completed because of something that is completely out of your control?"

Ms Sanghera said a recent example of the flawed system was the clawback of commission for a loan that had required working over Christmas and paying staff double time to pull it
together. 

On top of that, Ms Sanghera said, the client would have lost a $180,000 deposit on an off-the-plan property had her team not been able to secure lending quickly. 

“Most clients stay with their lender for the long-term, but if they decide to refinance or perhaps repay the mortgage because of an inheritance quickly that is their absolute right to do so,” said Ms Sanghera. 

“Why should brokers, which are generally small businesses, be financially penalised for decisions that we have no control over and why does the government seem to think this is appropriate? 

“Likewise, the system is not transparent as lenders simply notify us of clawbacks but aren’t required to provide evidence.” 

Ms Sanghera said that technology would make it simple for banks to identify brokers who were churning clients, however, the clawback policy penalised everyone. 

“I just can’t understand why the industry allows all brokers to have to pay back the money they have earned if the client does the wrong thing by the broker and, ultimately, the lender," said Ms Sanghera. 

She said brokers often lost thousands of dollars from clawbacks, which made growing their small businesses difficult because of cash flows uncertainty. 

“Clawbacks were introduced prior to the royal commission and have always been bad policy,” said Ms Sanghera. 

“Now it is set to become law with the only beneficiaries being big banks."

Find out more on the bill here.

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