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The brokerage CEO has called for a “more even sharing” of the loss incurred by brokers and lenders when a borrower defaults or refinances.
Speaking to The Adviser, Mortgage Choice CEO Susan Mitchell expressed support for reforms to existing clawback arrangements to help offset losses incurred by brokers who – as per the banking royal commission’s recommendation – will no longer be permitted to charge borrowers that have refinanced or defaulted on their home loan within the clawback period.
In his final report, commissioner Kenneth Hayne recommended that clawbacks not be passed on to borrowers if upfront and/or trailing commissions remained part of the broker remuneration model.
“If commission payments were to remain, I would support the recommendation made by the Productivity Commission to prohibit commission clawbacks from being passed on to borrowers,” commissioner Hayne said.
Commissioner Hayne’s recommendation will now take effect, with commission-based remuneration set to remain in place for at least the next three years.
Ms Mitchell stated that while she believes the industry is “stuck” with clawbacks, arrangements could be reformed to ensure that lenders bear a larger portion of the loss in the first year of a loan term.
“Unfortunately, because it fits within an overall remuneration structure, we’re kind of stuck with clawbacks,” she said. “But I think the important thing is to make it fairer for the broker.”
She continued: “The idea that you lose 100 per cent of your income on day 10 [of a loan term] and then on day 364 you also lose 100 per cent of your upfront income, doesn’t really seem fair.
“Perhaps a more even sharing of the loss between a bank and the broker over the first year, I think would be a fairer structure.”
Ms Mitchell noted that for a standard clawback structure, 100 per cent of an upfront commission is clawed back in the first year of a loan term, with the proportion of the clawed-back amount decreasing to approximately 50 per cent over the remainder of the clawback period.
However, the chief executive suggested that the proportion of the commission clawed back “move down to 50 per cent evenly throughout the first year”.
“The bank has paid to acquire an asset and the broker has done work, and both of them have lost out, so a more even share of that would be fairer,” she added.
Ms Mitchell also backed Connective managing director Mark Haron’s suggestion that brokers charge a fee to higher-risk borrowers who may be more likely to default or refinance their loan within the clawback period.
“I think it’s perfectly fine. I think it’s a great idea for brokers to charge a fee upfront for arranging a loan when the intent of the borrower is clear,” she said.
“I’m not talking about someone who changes their mind nine months in [because] their circumstances have changed. That’s what [the royal commission] doesn’t want brokers to charge borrowers for.
“But let’s say you have a customer that buys and fixes up houses and sells them – he’s always going to sell that house within nine months. For someone like that, it’s clear the intention is to sell that house or sell that property, then I think the broker should feel free to charge the person a free upfront.”
The managing director of the Finance Brokers Association of Australia, Peter White, has previously told The Adviser that he would be closely monitoring developments in the implementation of clawback reforms.
Mr White said that he wanted to ensure that the incoming requirements did not penalise brokers for things that were out of their control.
“When an unforeseeable circumstance occurs (like someone passing away or moving overseas, etc.) it’s not that a broker hasn’t done their job,” he said.
“They’ve done their job – it was elements out of their control that saw the loan repaid. And this is where best interests [duty] is going to have an interesting part to play.
“I believe that, if you have done your job, you should get paid for doing your job. And if you are acting in the best interests of your client, you shouldn’t have anything that impedes you from that judgement – but potentially a clawback might.”
[Related: Broker free flagged as option to mitigate clawback risks]
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Charbel Kadib
AUTHOR
Charbel Kadib is the news editor on The Adviser and Mortgage Business.
Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.
Email Charbel on: Charbel.Kadib@momentummedia.com.au