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ISCOVER
Despite collaborative efforts between lenders and brokers, there’s an underlying issue that needs a spotlight: the skewed relationship in remuneration. Phil Rice dives into the nitty-gritty of this matter and explores the call for change.
The broking industry has become the go-to choice for borrowers, with over 70 per cent of mortgage applications now finding their way through the broker channel.
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But while brokers and lenders must work hand in hand, there’s a disparity in remuneration that needs addressing to create an even playing field.
The bone of contention here is the notorious clawback clause that seems to tip the scales unfairly.
New legislation on unfair contract terms (UCT) in Australia, effective since November 2023, aims to address this issue. The legislation, by definition, identifies clawback clauses as causing significant imbalances and being unnecessary for protecting legitimate interests.
But why do these laws protecting SMEs in “standard form contracts” not extend to mortgage and finance brokers who are, essentially, SMEs themselves?
The clawback clause appears in the standard form contract between broker/aggregator/bank. It’s a pertinent question that demands attention.
Unpacking the legislation
To understand the legislation better, let’s break it down into its three core elements:
- Clawback clauses create an imbalance in parties’ rights and obligations.
- They aren’t reasonably necessary to protect the advantaged party’s legitimate interests.
- Applying or relying on them would cause detriment to a party.
All three aspects must be proven for a court to declare a term unfair.
The cost of clawbacks
The financial toll on small businesses is substantial.
From 2018–21, the average annual clawback value per mortgage/finance broker in Australia surged by 47.4 per cent, reaching $15,077 in 2021. Extrapolating this over 19,000 brokers, it amounts to a staggering $2.86 billion annually.
This significant sum is taken from small-business owners, impacting their families and the economy, while banks reap disproportionate profits.
The burden on brokers
One critical issue is the brokers’ inability to control loan contract terms up to two years after loan settlement.
For example, borrowers might move lenders for external life factors or things beyond a broker’s control, such as:
- Job loss
- Divorce
- Ill health
- Enticing cashback offers from banks to consumers for refinancing trigger clawbacks to brokers
- Not happy with their bank or lender’s service
This places an undue burden on small broker businesses, forcing them to bear the entire financial impact of monetary loss, a responsibility that rightly belongs to the banks or lenders.
A call for removal
It’s imperative that the clawback clause is swiftly removed from standard form contracts between banks/lenders/aggregators and mortgage and finance brokers, aligning with Australian laws.
The unfulfilled promise of best interests duty (BID)
Despite the introduction of the best interests duty on 1 January 2021, aiming to protect clients’ interests, the clawback clause remains.
Clawbacks were primarily introduced by banks and lenders to manage/mitigate loan “churning” by brokers. With the introduction of BID, the requirement or need for a “churn” deterrent (clawbacks) has been replaced.
Regrettably, many banks and lenders have ignored what the legislation represents, to continue with clawbacks to bolster profits and cause financial hardship to brokers, which many banks see as competitors (getting rid of the competition).
Reimbursement proposal
To rectify this, we propose the removal of the clawback clause in all contracts and the reimbursement of all clawbacks initiated from 1 January 2021.
Considering the multibillion-dollar profits of banks, this reimbursement seeks to restore balance and fairness in the industry.
Addressing concerns
Some within the industry expressed concerns that removing the clawback may disadvantage brokers as the bank/lender could seek to recoup the loss from brokers in a different way (e.g. lower commissions).
But it’s crucial to remember:
- Banks and lenders must abide by Australian law, ensuring a fair and equitable playing field for all industry players, including SMEs.
- Historical risk management by banks included factoring in early loan closures and they can still address short-term risks without penalising partners (e.g. banks and lenders across the board could add, say, 0.05 per cent to loan facilities to cover any short-term risk, without penalising partners and preserving profits).
- Legislation against unfair practices must extend to all SMEs, preventing undue burdens on small broker businesses.
In conclusion, the time is ripe for a paradigm shift in the mortgage and finance broking landscape.
The removal of the clawback clause is not just a legal necessity; it’s a call for fairness, equity, and a healthier financial ecosystem for all stakeholders involved.
Let’s advocate change and pave the way for a more balanced future.
Phil Rice is the chief executive of the Business Advice Agency (BAA).
He has more than 27 years of finance experience and has been advocating a “fairer deal” for brokers when it comes to clawback, including by raising the issue with AFCA, ASIC, the small business ombudsman’s office in Queensland, and the broker associations.
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