Clawback – banks are "double dipping"

As part of a detailed submission to government, the FBAA has presented a report which managing director Peter White AM hopes will prove that there is nothing wrong with the current remuneration structure for brokers – other than clawback, that is. The practice of lenders clawing back commissions paid to brokers after a loan terminates within the first two years of settlement is an unfair practice for a number of reasons according to White. He told MPA that while he thinks the practice should be removed altogether in the case of borrower life events, as part of its submission to government, the FBAA has lobbied for the timeline to be shortened to 12 months.

“From a broker point of view, I think it should be completely banned,” he said. “I’m looking at where government or regulation would land on this. They’re not going to intervene in that conversation, all I can get them to do is pull back on the limit of it.”

Referring to instances whereby the loan terminates early due to a life event such as a client divorce or unexpected move, White said it was up to lenders to take “moral, appropriate business ground and say that if it’s out of your control there is no clawback.”

“Nothing is stopping the lenders in this country completely abolishing clawbacks if they want to,” he said. “The power is theirs to do it, it’s just that they choose not to, and they choose to take it twice - they double dip within the rate margins and then they take it off the broker, and that just stinks, it’s hypocrisy.

“Really the lenders should step up to the plate and be bigger people than what they are because they have the power to change this as well.”

Read more: Client divorce costs broker $30,000

He said marginalisation, whereby lenders build the cost of doing business into the headline rate, already accounts for the potential loss from early termination of a loan – something that is included in every loan, whether written through the broker or the direct channel.

“That means the banks have already provisioned it, so when they take it off a broker as a clawback, they’re double dipping, they’ve got it twice and that is unconscionable in my books,” he said. “It’s just completely unfair.”

He said while there was a place for it in order to cover breaches of law, it shouldn’t be levied against brokers due to the changing circumstances of clients.

“Clawback won’t ever be abolished,” he said. “It’s something we have to live with, but it needs to be properly aligned so it is more reflective of the reality of what’s happened.

“At the time of settlement, a broker only gets half of what they are already entitled to, so to have somebody in your pocket for two years to potentially take up to 100% of that away when you’ve only potentially received half of what you’re entitled to in the first place is just criminal – it is just completely illogical.

“The broker has had all the expenses they’ve managed and carried to be able to conduct the business to find a borrower, take them through the process and see a loan settle, to only get paid half of what you’re entitled to and have someone in your pocket trying to pull out 100% over two years. Fundamentally, from a business point of view - the dumbest thing on the planet.

“That needs to be changed. I’ve been against it since it started.”

Read next: Sam White reveals hopes around clawback and regulatory change

When it first came in, the fundamental premise of clawback was very different to what is being applied in the current environment, he said.

“A lot of people say this was to stop churn,” he said. “Yes, it was, but it was to stop the churn of portfolios, not the movement of individual loans based on circumstantial benefit to the borrower. It was never designed for that. It was to stop people picking up $200 million worth of loans and moving from this lender to another lender just to bank money. Over all these years, we’ve distorted that and lost that fundamental premise and applied it to individual loans which, fundamentally, is wrong.

“We need to reset this to make sense, to be fair and reasonable to business people who don’t get a refund on their expenses. Once you’ve done your job you should be paid and keep it. They don’t take it off a bank manager if a bank loan goes early from a branch.”

White said the overall purpose of the FBAA’s 161-page submission to government was to proactively demonstrate that there was no need for the upcoming review on broker remuneration slated for 2022. According to a member survey, 98% of consumers said they would use the same broker again, 98% said their brokers had acted in their best interest and 94% had no concern the broker was remunerated by commission.

“We’ve been conducting research as a means to talk to that review as an early opener – a proactive approach, to say we have done a whole lot of research and the data says there is nothing to see here,” said White. “By the time we do this it will be eight years that broker remuneration has been under the microscope. This whole thing has to stop. It’s just stupid - there is no data that says it needs to change.”

The remuneration review was one of the recommendations stemming from the royal commission into financial services. Since then, there have been several regulatory changes in the broking industry to address many of the issues highlighted.

“When that royal commission was done, it was looking at data that went back to 2012,” said White. “By the time the committee looks at this it will be 10 years later than the data that was in the royal commission.

“When the royal commission happened, there was no BID, there was no conflicted remuneration bans. A whole lot of regulation has happened since the royal commission, so a lot of the concerns, if we can call them concerns, that the royal commission has expressed have been dealt with now. There is no further need to adjust broker remuneration.”