FBAA joins commission clawback debate

While some New Zealand banks claw back upfront commission paid to mortgage advisers if clients make lump sum mortgage payments, this does not occur in Australia, the FBAA says. 

Meanwhile, Kiwibank has confirmed that it does not claw back adviser commission when lump sum payments are made by its mortgage customers, a position also held by Bank of New Zealand.

‘Clawback’ refers to the ability for banks to reclaim commission payments made to mortgage advisers in situations where a client’s mortgage ends early, for example if it is refinanced to another bank or repaid in full within a 24 to 27-month period.

NZ Adviser understands that clawback of adviser commission can apply when customers make lump sum payments on their mortgage within a specified timeframe. While accepting that clawback of commission will apply if a mortgage is discharged early, a New Zealand mortgage adviser has raised concerns that clawbacks for lump sum payments do not support advisers in giving good advice.  

Clawback of upfront commission ‘not fair’ for lump sum payments - FBAA

FBAA managing director Peter White (pictured above) announced in November that the Australian mortgage broker body would expand its operations in New Zealand, providing a dedicated membership organisation for New Zealand mortgage advisers.

While movement of money in and out of offset accounts could trigger a clawback of commission paid to mortgage brokers in Australia, White confirmed that lump sum reductions to a loan balance don’t.

“Clawback should not exist when people are making lump sum reductions – there’s no reason for it,” White said.

Banks in Australia recognise that where lump sum reductions are made, the principal loan balance is reduced by the lump sum. The mortgage broker’s trail commission (which is based on the daily amortised balance) drops, meaning that the broker’s trail income reduces, White said.

“You’re going to affect your trail and that’s a fair call, because the principal balance is reduced by the lump sum,” he said.

Upfront commission covers ‘cost of origination’

White said that it was important not to lose sight of what upfront commission paid to mortgage advisers and brokers was for.  It is the “cost of origination" – finding the borrower, working through the application process and settling a loan, he said.

Acknowledging that clawbacks traditionally acted as a deterrent to churn of business, White said that acting in the best interests of a client should be the overarching principle.

Clawback was never about the one loan, and this is something that is "quite often forgotten", he said. If advisers do the maths and it makes sense, they should be supported in doing the right thing by their clients.

Clawback of adviser commission for lump sum repayments is one of the nuances that needs to be worked through, he said.

What do New Zealand banks do?

ANZ, ASB Bank, Bank of New Zealand, Kiwibank and Westpac have commented on their approach to clawback of adviser commission when lump sum mortgage repayments are made.  

ANZ said that commission could be clawed back, but that this was “at ANZ’s discretion”. ASB Bank said that the clawback amount was waived where it was under a certain threshold, on compassionate grounds and where it was “fair and reasonable to do so”.

BNZ said that it did not clawback adviser commission when a customer made a lump sum payment, and Westpac said that clawbacks helped to create longer-term relationships with its customers and mortgage advisers, which “ultimately benefits all parties”.

Kiwibank general manager home lending Nicole Pervan (pictured immediately below) has clarified the bank’s position on clawback of adviser commissions for lump sum payments, confirming that its practice is in line with BNZ’s.

“If a customer makes a lump sum payment, it will not result in a commission clawback from the adviser, provided the loan is not repaid in full,” Pervan said.

Kiwibank works closely with adviser partners to ensure there are fair and competitive deals for customers, Pervan said.

“If there are any issues that arise, we work closely with our adviser partners on how these can be managed.”

Countering clawback concerns

While lenders reserve the right to set their own rules and procedures, White said that having a collective understanding of “what’s fair and what’s not” was important.

Australia and New Zealand share a range of commonalities, not least of which is the fact that four of New Zealand’s five main banks are Australia-owned.

The FBAA New Zealand mortgage adviser body, which will be called the Finance and Mortgage Advisers Association of New Zealand (FAMNZ), is prepared to front clawback discussions and other relevant issues and initiatives, White said.

“This is something we’re very well versed in and understand … we’re the fair players and that’s what it’s about, is being fair,” White said.

FAMNZ plans to open its doors in New Zealand on February 1, 2024 and has a mission grow mortgage adviser market share from the current level of 45% to 50%, to 60% and 70% and beyond over time. 

Mortgage advisers only get paid when they deliver and settle, representing a cost-effective distribution channel for lenders, while advisers provide a personalised, tailored service for Kiwis wanting to buy a home, demand for which is only going to grow, White said.

Do you have any concerns about clawback practices in New Zealand? Share your thoughts in the comments section below.