Opinion: Referral commissions for brokers from real estate sector aren't dead

But here's what you need to know to make sure you're being compliant and lawful, says Leverage Group solicitor Craig Swan

By MPA

18 Jun 2018

The “new” Property and Stock Act, passed by the NSW Parliament earlier this year, being the result of the Property, Stock and Business Agent’s Amendment (Property Industry Reform) Bill 2017, will not alter the existing regime or requirement for those receiving fees or commission from the sale of property from holding a Real Estate Agent’s Licence.

This new Act will, according to the NSW Office of Fair Trading (NSW OFT) who administers the Act, take effect when the regulations to the Act have been drafted (estimated to be October/November this year), and will without question require significantly more training, as well as a mandatory 12 or 24 months of experience before a licence can be issued.

Importantly, however, the need to have a licence when receiving a commission in this way is not something new in the real estate sector– whether you are a real estate agent, a mortgage broker, a financial planner, an accountant or a migration agent.

Needing to hold a licence under the Property, Stock and Business Agent’s Act (soon to become the Property and Stock Act) when receiving a commission from the sale or management of a property, has in fact been part of NSW real estate sector legislation for over 70 years!

Looking more closely at how “off the plan” sales, other investment properties and “distressed properties” are marketed by way of client introductions from brokers, accountants, solicitors and planners – there is reason to be careful, so as not to fall foul of the law where earning commission “from both sides” may occur. Earning a fee/commission from both the vendor and the purchaser on the same transaction is manifestly, and without doubt, illegal.

This is not to say, however, that all referral intermediaries that receive remuneration (commission) from selling property, are acting illegally. More often than not, it’s quite the opposite.

Take for example a mortgage broker who holds a Real Estate Agent’s Licence and receives commission from a vendor (which would include developers and any form of “aggregation platform” or research house, etc). Provided that this commission is disclosed to the mortgage broker’s client, and the mortgage broker does not also receive fees/commission from the client, then the mortgage broker has clearly identified the potential conflict of interest, and has managed it, which is what the law requires.

By disclosing their commission to their client, and thereby clarifying that they do not act in a fiduciary capacity in regard to the sale of the property (ie. they are merely a referrer), they are satisfying their compliance obligations.

Alternately, the mortgage broker has the option to act in the capacity of a Buyer’s Agent (using their Real Estate Agent Licence) and charge the client a fee/commission (thereby acting in the capacity of a fiduciary) – and not look to the vendor for payment.

July 1, 2018 does not herald a new era in regard to those receiving commission from real estate sales, being required to hold a licence– this has been the law for decades already.

When the new Property and Stock Act takes effect later this year (at a point when the regulations have been drafted and the NSW OFT is ready to administer the new Act) – brokers and other property sale referral intermediaries would be very well advised to be licensed ahead of time since the pathway to obtaining a Real Estate Licence is going to become far more costly, will take much more time and most critically, will require 12 or 24 months practical experience (a requirement that is not currently necessary to apply for a licence).

As a result, the value of holding a Real Estate Licence (as well as the other licences being retained in the new Act), will increase by multiples.

Managing client risk, as between offering mortgage broking services, property sales and/or financial planning services (all administered by separate licensing Acts/regimes), to the same client is nothing new – nor is the requirement for holding the relevant licence if you’re active and being remunerated in that particular sector.

Craig Swan is the chief commercial officer and a senior solicitor with Leverage Group. He has more than 25 years’ experience in the finance and property sectors. For more information, visit: leveragegroup.com.au