The unique inequity of commission clawbacks
In arguments reminiscent of those put by life/risk advisers confronted by the Life Insurance Framework, mortgage brokers have argued claw-back arrangements on upfront commissions have placed them at a unique disadvantage to those working in other industries.
The Senate Economics Committee inquiry into consumer protections in the banking, insurance and financial sector was told of the substantial work done by mortgage brokers to put mortgages in place.
Finance Brokers Association of Australia chief executive, Peter White has used an answer to a question on notice to the inquiry to argue home loan mortgage brokers have at risk up to 100 per cent of their upfront income under the claw-back arrangements prevailing in the industry.
“… home loan mortgage brokers also have at risk up to 100 per cent of their upfront income able to be clawed back (taken back off them) by the lender for up to two years if the loan terminates early for any reason,” he said. “I know of no other industry whereby you can do your job and complete your work and be paid for it yet it can be taken off you for no cause of your own for up to two years after the event.”
However he conceded that the current commission model which had been commercially legally agreed by the parties had assisted in ensuring deliberate churn is minimised “and that best consumer outcomes are achieved whilst fair commercial remuneration is transacted with and paid for by the banks without any impact to the borrowers’ interest rate or costs to the borrower to provide the service to the borrower”.
“A flat fee model which I have stated should be discussed, risks the potential for very poor consumer outcomes as that smaller loan sizes would not be commercially feasible to the lender and therefore would result in a higher cost of acquisition to the lender (for example: if the flat fee was $3,000 to a broker, a loan size of $200,000 at an average commissions of 0.60 per cent as is today, would be $1,200 in commission to the broker.),” White said. “In such a case the end result is that banks will not accept being worse off so the first action they would take is to increase interest rates to compensate for such.”
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