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As lenders begin to change the way they remunerate brokers off the back of regulator recommendations, the Combined Industry Forum has reiterated that the new structure should include commissions paid on initial and subsequent drawdowns.
The recommendations from the ASIC and Sedgwick reviews, which were backed by the Combined Industry Forum (CIF) package of reforms, proposed that lenders change their standard commission arrangements so that brokers are not incentivised “purely on the size of the loan”.
Instead, ASIC suggested that lenders could “reflect the loan-to-value ratio (LVR) of the loan (and other considerations such as compliance metrics) in how they calculate upfront and trail commissions”.
It also suggested that that lenders “do not structure their incentives in a way that encourages the creation of larger loans that initially have large offset balance”.
In response to ASIC’s proposal for changing standard commission models, the CIF considered that industry participants may adopt the following remuneration principle: “To the extent that remuneration relates to loan size, remuneration should relate to the funds drawn down and utilised by a customer”.
At a CIF event in Melbourne on Monday (10 September), the Combined Industry Forum panel was asked whether the new broker remuneration structure put forward in its package of reforms would include payments for additional utilisation.
Stephen Dinte, principal mortgage planner at Australian Mortgage Planners and member of the Independent Finance Brokers Forum (IFBF), outlined a scenario in which a borrower might apply for a loan but place some of the money into a redraw or offset and asked whether commissions would be paid on both the initial and subsequent drawdowns.
Mr Dinte said: “I don’t have a problem per se on getting paid on the net utilisation at the point of time of the initial settlement… but how can we be sure that we are now going to get paid for the additional utilisation over the coming year or two years, because we are suffering from a two-year clawback?
“It’s good enough for the lenders to monitor the loan and say, well, it has been discharged and therefore all the comm that you received is being taken back or part of the comm even, if the whole loan isn’t discharged, so what guarantees are we as brokers going to get, and are our aggregators going to be the ones that stand up for us?”
In response to the question, the CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, said: “The guidance was that there would be remuneration on successive drawdowns as well, so that is the way it is structured, which should capture your scenario.”
The guidance, which was included in the Combined Industry Forum’s response to ASIC’s remuneration review, reads: “Generally, funds drawn down would be measured and commission paid on initial settlement and at a later point in time for subsequent drawn down amounts, up to the maximum facility limit.
“The CIF recognises that this approach to funds drawn down and utilised may require further consideration in certain limited circumstances, such as residential construction lending.
“As long as this principle is stated, there should be no restrictions placed on lenders adopting additional methodologies of calculating commission payments.”
The recent progress report from the CIF has outlined that “for the most part, this work is well underway” and it is expected that Combined Industry Forum members will implement these changes by the end of 2018.
NAB and Advantedge commit to subsequent drawdown commissions
Indeed, less than 24 hours after the comments were made, NAB and Advantedge both announced that they were making changes to the way they remunerate brokers.
From Monday, 12 November, NAB and its white label brand Advantedge will calculate the upfront commission a broker receives for a home loan based on the amount drawn instead of the total approved facility and net of any offset facility.
The two brands have stated that should a customer retain funds to be used at a later date, it will pay upfront commission on the subsequent drawdown amount (i.e. on loan funds used after the initial drawdown), net of any linked offset facility, provided the initial settlement occurs after Monday, 12 November 2018, and the subsequent drawdown:
- Occurs on or after the sixth calendar day following the initial drawdown date; and
- Occurs within 12 months of the initial drawdown date; and
- Is for an amount equal to, or greater than $20,000, up to the maximum loan split limit.
In an update to brokers, NAB and Advantedge said that the maximum commission payable for a subsequent drawdown “must not exceed the commission that would have been payable if the loan account was fully drawn as at five calendar days after the initial settlement date”.
Further, brokers will not be paid commission on subsequent drawdowns “where it exceeds the maximum commission payable if the loan was fully drawn at settlement, or, for construction loans, non-term loans or where a variation to the original loan has occurred, or the subsequent drawdown was not disclosed in the loan application”.
The commission changes will also see updates to clawbacks, with Advantedge outlining that it will update its clawback model for new loans and variations approved and instructed from Monday, 12 November 2018, so that 100 per cent clawback will apply up to 12 months, a 50 per cent clawback will apply between 13 and 24 months, and no clawback will be applied after two years.
Speaking during the CIF event on Monday, Connective director and CIF deputy chair Mark Haron said that the group was “making sure that [lenders] can’t claw back any more that they have paid”, adding that they “cannot claw back on the limit, only on what is paid out”.
[Related: Major bank changes broker commissions]
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