Net of offset – the "gold standard" being lobbied for

Two of Australia’s largest mortgage aggregators have spoken out on net of offset, outlining the changes they would like to see being made by lenders.

Speaking with MPA, AFG general manager industry and partnerships Mark Hewitt said the aggregator would like to see a “gold standard” adopted across the board from lenders, while Loan Market group executive, risk and strategic partnerships David McQueen said clawback reform was firmly on the agenda.

Both were responding to questions around the level of impact the net of offset ruling had been having on brokers since it was implemented September last year following ASIC’s review of mortgage broking remuneration and the Sedgwick Review, both of which cast uncertainty around the future of commission-based remuneration.

According to seasoned mortgage broker Stephen Dinte, the lack of consistency in the way net of offset was implemented by lenders was causing real problems for brokers.

“Brokers are not being treated fairly by lenders,” he told MPA. “When the regulation came into effect in September last year, the regulation had a stipulation in it about calculating the maximum payment to a broker. There is a whole section in the regulation that explains how it’s done, but there was no prescribed minimum or prescribed methodology for lenders to apply across the board. So in fact, what’s happened is we have this ad hoc application of the legislation and that results in some pretty dire situations for brokers when we start talking about net of offset payments and commissions.”

Read more: Net of offset – "brokers are being done over"

McQueen said brokers had raised similar issues with Loan Market.

“The biggest issue has been the confusion this has caused for our brokers, primarily around the way in which different lenders calculate commissions,” he said. “In addition - particularly under the previous 90-day cap model - there may be instances where a broker receives no, or heavily reduced, commission for arranging a loan.”

According to Hewitt, the lack of standardisation posed an issue for brokers.

“The main issue brokers have struggled with is the inconsistent timing of initial and subsequent reviews and the payment of commissions once offset funds have been utilised,” he said. “Some lenders have introduced monthly reviews and/or payments and this is the ‘gold standard’ we encourage other lenders to adopt.

“The main frustration (of brokers) has been in relation to the timing and potentially having to wait up to 12 months for payment. That said, we have found that lenders have been very supportive in assisting us with individual cases where the broker has been badly disadvantaged.

“I would encourage brokers to speak to their aggregator if they require assistance negotiating with lenders.”

“Brokers are incredibly resilient,” said McQueen. “However, there is no doubt that with increased compliance obligations and challenges with turnaround times, complexity and reductions in the way our brokers are paid is not a positive.”

According to Dinte, not only are brokers missing out on part of their commission when extra funds stay parked in their offset account for longer than what the lender’s policy allows for, brokers have also been unfairly penalised for circumstances outside of their control. He said he has heard of instances whereby a broker has received an upfront commission for the full loan amount only to have a portion of it clawed back after the client unexpectedly received a large sum of money from an inheritance or similar within 12 months of the loan being settled.

“Tell me one other occupation where, after somebody’s done the work, they have the money taken back off them because of some unforeseen, unknowable situation in the future. Brokers are by far at the lowest level of the totem pole,” he said.

“People know about this stuff, but nothing is being done about it to help the broker. If they wonder why the numbers are diminishing, this is one of the reasons. Brokers are being done over, left, right and centre.”

According to Hewitt, however, this is something that aggregators had successfully lobbied against. He said he was not aware of any instances where lenders were still clawing back.

“This was happening initially however has now stopped after aggregator lobbying of lenders,” he said.

McQueen said Loan Market saw an opportunity to “drive more progression in this space” following its recent restructuring.

“The shift to 365 days is a positive, but clawback reform is also on our agenda,” he said.

Read more: Client divorce costs broker $30,000

In terms of the further changes the aggregators would like to see occur, Hewitt said the gold standard AFG was lobbying lenders to implement was around standardisation of the review process.

“We would like to see lenders move to a monthly review system and we continue to discuss this with our lender panel,” he said.

McQueen said Loan Market’s work in the space was far from over.

“The move from 90 days to 365 was definitely a positive and one we had been advocating for. However, our belief is that net of offset should mirror clawback provisions,” he said. “If it is good enough for banks to claw back the money over two years, it should also be good enough to increase the upfronts over that same time period.

“Alternatively, clawback provisions should be limited to 12 months, a move that would be aligned with net of offset, but also drive better customer outcomes and ensure brokers are fairly remunerated for acting in their clients’ best interests when a client needs change within a short period.”