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The final regulations for mortgage brokers focusing on the new clawback requirements and conflicted remuneration have been released by government.
After increasing calls for more clarity around the upcoming changes to clawback arrangements – as recommended by commissioner Hayne in his final report for the banking royal commission last year – the federal government has now released the final regulations.
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The “Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers) (Mortgage Brokers) Regulations 2020” build on the draft regulations, released in August 2019 for public consultation.
While the final regulations include updates following both public and “targeted” consultation, they do not include material changes to the draft clawback provisions.
Clawback arrangements
The explanatory statement reads: “Under the regulations, certain clawback arrangements are banned.
“Currently, many credit providers have clawback arrangements with aggregators, which in turn have arrangements with brokers. Such arrangements allow a credit provider to recover some or all of the commission paid by the lender to the aggregator if the loan does not continue beyond a minimum ‘clawback period’. The aggregator will then in turn claw back the commission from the broker, who may claw it back from the consumer.
“Clawbacks may therefore discourage mortgage brokers and consumers from exploring new and better loans because they add to the cost of switching products,” it reads.
The regulations therefore set out the specific “clawback requirements” that must be met if a benefit is to fall within the exemption from the definition of conflicted remuneration.
Firstly, the regulations ban clawback arrangements if they apply for more than two years from the beginning of the credit contract.
The two years is generally timed from the first day on which an amount of credit is drawn down by the consumer under the credit contract.
However, for a credit contract under which credit is provided that is wholly or partly to refinance credit, the two years starts on the first day on an amount of credit is provided to the consumer under the credit contract after the refinanced credit is made available.
The regulations also specify that the repayment obligation “must not require repayment of an amount greater than the benefit given to the licensee or representative”.
Moreover, it emphasises that “the consumer must not be subject to an obligation to pay an amount as a result of an amount being required to be repaid under the repayment obligation”.
While the final regulations do not include changes to the draft clawback provisions, several changes were made regarding remuneration.
These include:
- modifying how the maximum commission payable to the broker on the amount drawn down by the borrower is calculated;
- excluding specific products from the as well as excluding line of credit facilities, reverse mortgages and credit facilities which are predominantly for construction or renovation purposes from this calculation;
- providing further details on volume-based benefits.
Click to read the full regulations and explanatory statement.
[Related: Clawback changes to take effect 1 January: Treasury]
