Dispute resolution service issues advice
Dispute resolution service Financial Services Complaints Ltd (FSCL) has released a case study involving two property investors who claimed that their adviser’s commission clawback was unfair.
The case study featured Jason and Roimata (clients), who decided to buy a second property in June 2020 and asked their financial adviser to help them arrange finance.
However, after calculating, the adviser told the clients to refinance their existing mortgage and borrow from a second-tier lender because they could not meet the bank’s stricter servicing requirements at the time.
Jason and Roimata completed the purchase with finance from the second-tier lender. However, after a year or so, they decided to refinance with a bank with lower interest rates than their lender. Their adviser then sent them an invoice for the commission that had been “clawed back” by the lender because the clients had refinanced within two years.
Jason and Roimata complained to the FSCL about the clawback fee and claimed that their adviser’s advice was flawed because they were allowed to refinance with the bank despite being told by the adviser that the bank would not lend. They wanted the adviser to pay their legal fees for both transactions and the difference in interest they had paid over the last year.
The adviser argued that he was entitled to the $8,000 clawback fee because it was the commission that the lender had “clawed back” from him.
He claimed that the clients did not meet the bank’s servicing requirements in June 2020 when the COVID-19 pandemic impacted the New Zealand economy. Specifically, banks were not accepting commission income or business income for the previous financial year, given the unknown impacts of the pandemic – reducing the clients’ income for the purposes of a lending application.
Read more: Financial advisers identify solutions that make the most difference for clients
After reviewing the adviser’s advice, documentation, and calculations, the FSCL decided that the adviser had given reasonable advice when recommending that the clients get finance from a second-tier lender, given the circumstances in June 2020.
As for the clawback fee, FSCL said it was satisfied that the adviser had properly disclosed the fee to the clients. However, it found the fee too high for the work undertaken in arranging the loan and refinance.
FSCL suggested the adviser discount the clawback fee by 50% to $4,000, which would more reasonably reflect the work undertaken. The clients disagreed with the suggestion and wanted to proceed with their complaint.
As a result, the adviser offered to discount the clawback fee by 75% to $2,000. The FSCL described it as a reasonable offer, given it would say the adviser was entitled to some of the fees if the investigation continued.
Jason and Roimata said they would discontinue their complaint if the adviser waived the clawback fee. The adviser agreed, and the FSCL closed the investigation.
The FSCL advised: “If mortgage brokers/advisers want to recover the brokerage or commission clawed back by a lender from their former customers, they need to communicate this clearly.
“Ideally, the fee and the circumstances in which it will be charged should be set out in plain language with an acknowledgement signed by the customer. We also expect to see some indication of the amount the customer can expect to pay and how the amount is calculated. Ideally, the fee should reflect the value of the actual work undertaken.”
