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Australian advisers told clawbacks are “unnecessary”

Australian mortgage advisers have been told there is no need for financial clawbacks to be imposed on them any more.

Monday, May 30th 2022, 10:15AM 4 Comments

by Eric Frykberg

The comments came in a speech by Daniel Crennan QC, who's the former deputy chairman of regulator the Australian Securities & Investments Commission (ASIC).

Crennan said he did not believe clawbacks should be imposed since mortgage brokers had a “best interests duties” obligation in place.

This best interests duty was imposed by law last year and meant advisers in Australia had to prioritise several things when dealing with clients.

These included costs such as fees and interest rates which would be imposed on a customer. However, non-cost considerations also had to be taken into account, such as the general benefit to a person from following a certain course of action.

Crennan argued the requirement that advisers do the best they can for their clients meant they should not be penalised with a clawback from a bank later on.

Despite this argument, the Australian trade journal, The Adviser, said clawbacks across the Tasman had increased 30% in the past few years.

In fact, there is no indication that clawbacks will disappear from the Australian market any time soon, even though the Labour Party in Canberra said before the election it was “open” to discussing them.

Here in New Zealand, clawbacks are well established and look likely to persist.

That is because they recompense banks for losses incurred when people pay back a loan early.

LoanMarker adviser Bruce Patten said that fees paid to brokers were set at a level that made a specific loan profitable.

If that loan was changed before its expiry date, then banks might put in a claim to be compensated by a clawback of some of the fees that had been paid out if they were due to incur a loss.

Patten said this practice has been going on for about 30 years. It was about the banks'' ability to break even, when they had paid a commission to originate a loan.

“A lot of brokers in New Zealand are not happy about clawbacks,” Patten said.

“But personally, I have no issue with them, because if you look at it on a commercial basis, we are being paid to do a job, and if that job doesn't stay around for a certain period, it costs the bank money.”

Some advisers are unhappy about being liable for a clawback for a problem not of their making, such as a marriage split that leads to debts being paid off early in order to clear the decks.
“But that's just a cost of doing business,” Patten said.

Tags: regulation

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Comments from our readers

On 30 May 2022 at 10:48 am Andy the adviser said:
Two points: One - if banks stopped throwing ridiculous mounts of cash at new clients to "Buy" the business, then clawbacks would not be an issue. This business of cash incentives does not do anyone any favours. It simply passes the cost on to the advisers, promotes churning, and ignores loyalty. It is a race to the bottom.

Two - why are mortgage Advises still being referred to as Brokers? A “broker” under the Act is a financial services provider who holds or deals with client money or property on behalf of clients.

Let's not confuse our clients any more than the latest legislation has done already.
On 30 May 2022 at 11:09 am dweusten said:
Lets clarify this, the payment is made to an FA for the work done to get the client the loan, and the bank pays it on behalf of the client. J

ust like the cash back the banks pay a client, the broker isn't asked to pay this back.

The lenders need to amend their clawback forms to advise the client the banks will also claw back the payment to the FA for work done on the clients behalf.

The claw back only happens from a clients actions, so they are in control. An FA being hit with a clawback says their skill, time, diligence and care are worthless.
On 30 May 2022 at 9:04 pm w k said:
@dweusten:"An FA being hit with a clawback says their skill, time, diligence and care are worthless."

you are absolutely correct. otherwise why would advisers who have been practicing for 20, 30, and over 40 years be required to sit for exams to re-qualify to practice? it's simply because those years of experience - skills, time, diligence and care - were worthless.
On 2 June 2022 at 1:40 pm Carlos7 said:
In this world of open transparency, compliance etc, there should be no need for clawback.

I understand it was originally placed in for the rogue adviser who was gaming the system, and that was because banks were taking a hit as the adviser moved the business from bank to bank in a very short amount of time frame.

I think each situation should be looked at closely, and if it was a life event , such as a Lotto win, a house sale that wasn’t planned, change of circumstances, separation etc there should be no clawback charged, as it was truly beyond the advisers control. How much does it really cost the bank, when you consider interest, fees etc they get on a client for the life of that client at the bank, ie you may bring them to a new bank, they pay off the lending but still remain as a client and the bank reaps the dividends of that client, either through fees, or deposit funds they would put into the account

If the FA knew about a house sale that would clear the funds in advanced its more than likely they would charge the client for their services anyway. Its only when client changes their mind which they can do that you get caught paying clawback.

As an adviser I would be reluctant to put a clause in Disclosures for all deals etc that if the loan is paid back within 27 months that a portion or all of the commission that bank provided a FA was to be paid back by the client even though the banks do that now for Cash back, but it feels different if an adviser asked this

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AIA 5.95 4.85 5.35 5.65
ANZ 5.94 ▲5.95 ▲6.40 ▲6.59
ANZ Blueprint to Build - - - -
ANZ Special - ▲5.35 ▲5.80 ▲5.99
ASB Bank 5.85 ▲5.35 ▲5.80 ▲5.99
Avanti Finance 5.95 - - -
Basecorp Finance 6.95 - - -
Bluestone 5.89 7.49 8.09 8.19
BNZ - Classic - ▲5.35 ▲5.69 ▲5.99
BNZ - Mortgage One 5.94 - - -
BNZ - Rapid Repay 5.94 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Std, FlyBuys 5.94 ▲5.95 ▲6.29 ▲6.59
BNZ - TotalMoney 5.94 - - -
CFML Loans 6.45 - - -
China Construction Bank 5.50 5.40 6.14 6.40
China Construction Bank Special - 4.45 5.19 5.45
Co-operative Bank - First Home Special - ▲4.75 - -
Co-operative Bank - Owner Occ 5.85 ▲4.85 ▲5.35 ▲5.65
Co-operative Bank - Standard 5.85 ▲5.35 ▲5.85 ▲6.15
Credit Union Auckland 5.95 - - -
First Credit Union Special 5.85 4.95 5.45 -
Heartland Bank - Online 4.10 ▲4.40 ▲4.90 ▲5.10
Lender Flt 1yr 2yr 3yr
Heretaunga Building Society 6.10 5.00 5.75 -
HSBC Premier 5.89 4.39 5.15 5.39
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 5.25 4.39 5.09 5.45
Kainga Ora 5.43 4.57 5.58 5.85
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 5.50 5.85 6.19 6.39
Kiwibank - Offset 5.50 - - -
Kiwibank Special 5.00 4.85 5.19 5.39
Liberty 4.84 - - -
Lender Flt 1yr 2yr 3yr
Nelson Building Society 6.45 ▲5.55 ▲6.15 -
Pepper Money 4.49 - - -
Resimac 6.19 5.60 6.16 6.29
SBS Bank 5.79 5.05 5.69 5.89
SBS Bank Special - 4.55 5.19 5.39
Select Home Loans 4.09 4.29 4.86 5.09
TSB Bank 5.59 5.14 5.79 6.15
TSB Special 4.79 4.34 4.99 5.35
Unity 5.65 4.95 5.55 -
Wairarapa Building Society 5.74 4.95 5.75 -
Westpac 5.94 ▲5.95 ▲6.29 ▲6.59
Lender Flt 1yr 2yr 3yr
Westpac - Offset 5.94 - - -
Westpac Special - ▲5.35 ▲5.69 ▲5.99
Median 5.85 5.00 5.69 5.99

Last updated: 23 June 2022 9:02am

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