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With brokers now obliged by law to put their clients’ interests first, “there’s no need to keep the clawback clause”.
Since the introduction of the best interests duty (BID) legislation, brokers have been required by law to put their clients’ interests first, nullifying the need for clawbacks, according to brokers.
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Broker and chief executive of EZ Finance, Philip Rice, is calling on the government to put an end to clawbacks, which he deems as “illegal”.
Mr Rice acknowledged the reason for the implementation of clawbacks to stop broker churn and prevent brokers from sending a deal to a lender and then six months later going to their client and moving them because of a better deal.
Speaking to The Adviser, he stated: “Back then there were a ton of brokers doing that, and the banks used it as the reason for putting in the clawback clause to stop the brokers from doing the churning.
“Then BID came along, which legally stopped all brokers from doing the wrong thing, but that didn’t overturn the clawback, the banks still charge the clawback even though there’s no need to keep the clawback clause there.”
Having written a white paper regarding the legality of clawbacks being implemented, Mr Rice told The Adviser that he believed that clawbacks were illegal as “the inclusion of the clawback clause in standard form contracts may infringe upon Australian law concerning such contracts”.
He also stated that the legal principle of quantum meruit establishes that individuals should be remunerated for the work they perform, with clawbacks going against this.
Mr Rice commented: “If someone’s done the work for you, you have to pay them.
“Brokers on average spend at least 20 hours to put together a home loan and then can get the whole lot taken back off them.
“The principle of quantum meruit allows for a fair and reasonable payment to be made to a party, who has provided valuable goods or services, ensuring that they are not unjustly deprived of compensation.”
Mr Rice said he wanted to see “clawbacks taken off because there is no need for it now, because BID is in and has replaced it” and he also wanted to see retrospective payments back to brokers who suffered from clawbacks since BID came in.
He added that it had been seen that clawbacks were no longer necessary as several lenders, such as Mortgage Ezy, have proven it by removing clawbacks on loans through its lending program.
In Mr Rice’s white paper, CEO of aggregator group Finsure, Simon Bednar, said with the inclusion of BID obligations, clawbacks were now “unjustified”.
“The protection for lenders against unnecessary churn or gaming to generate additional commission is the BID legislation,” Mr Bednar told the white paper.
“A handful of lenders don’t charge clawbacks, but most of them do to increase their profits,” Mr Rice concluded.
[Related: Clawback rate rises to 11%: Sam White]
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