The broking industry may be missing out on millions of dollars in commission payments as a result of complexities with how lenders calculate commissions and the pass-through to aggregators.
It’s a truth universally acknowledged in broking that broker remuneration is among the most frustrating and unfair remuneration structures there is.
While mortgage brokers are paid an upfront and trail commission (which are typically very similar across all lenders), there is perhaps no industry left so exposed, and so vulnerable to underpayment, than the broking industry.
There are two major factors that put broker remuneration at risk at the moment, neither of which the broker has complete control over:
1. Clawbacks (where lenders recoup the commissions paid to the broker if the borrower refinances away/pays out their mortgage within two years).
2. Inconsistencies and opacities with how net-of-offset commissions are calculated and paid.
While changes to broker remuneration were brought in following the banking royal commission – including tying upfront commissions to the amount drawn down by borrowers instead of the loan amount (net of offset) and limiting clawback to two years – the situation with broker remuneration seems to have gotten worse, not better, over the proceeding years.
The broking industry – from associations to aggregators to broker groups – has all been working hard to raise the profile of the inequities brokers face when it comes to being paid for the work they do, including (among many other moves):
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Raising the “unfair clawback” structure and net-of-offset commission structures impacting broker incomes with government ministers.
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Quantifying the level of revenue being clawed back from brokers each year (which rose to 11 per cent in 2023, according to LMG)
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Urging lenders to standardise clawback periods so that they’re amortised over the first 12 months.
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Putting forward the legal case for removing clawback.
But more needs to be done. It’s not just changing commissions to make them fairer that needs to be addressed but ensuring that brokers are actually being paid when they should be, too.
The missing money
While there’s no industry-wide research on the overall cost of missing commissions, a recent example of brokers being underpaid has suggested that the cost to industry could be millions, if not billions, of dollars.
Empower Wealth founder and managing director Ben Kingsley recently says that he tracked down $60,000 in unpaid commissions from his aggregator last year.
According to Kingsley, his brokerage last year lodged a commission inquiry to their aggregator Australian Finance Group (AFG) after believing that they had been underpaid on commissions.
“We thought we were getting paid [the right commission], but we didn’t have the systems and processes in place to track it,” he says.
“So, we asked our aggregator and they found out that there were discrepancies in the payments. We had to go back through several customer loans so they could be correctly connected, and then the commissions were paid.”
Kingsley says that the aggregator found $60,000 worth of upfront revenue that the company hadn’t been paid (and would have likely ended up as consolidated revenue for the head group).
According to AFG, a large factor for this mismatch was the complexity of the loan structures for Empower Wealth’s client base and the fact that these borrowers were heavily using offset accounts.
While brokers will likely have had conversations with their customers around how and when they’re going to be utilising the funds they receive, it’s not possible to actually track when funds are drawn down – making forecasting expected revenue impossible.
But if all 19,456 brokers in Australia were to have $60,000 in unpaid commissions, this would total more than $1.1 billion in unpaid commissions.
Kingsley says: “How do you know you get paid upfront and trail, net of offset? It’s just one big, black box that we – none of us – not even the aggregators – have line-of-sight on from the lenders.
“So, from that point of view, you’re taking a [leap] of faith that the lender is correctly calculating that.
“So, I’d say to brokers – if you don’t feel that your upfront revenue is right, you should lodge a commission inquiry with your aggregator and investigate,” he says, noting that his brokerage now does this annually.
If you don’t feel that your upfront revenue is right, you should lodge a commission inquiry with your aggregator and investigate
- Ben Kingsley, founder and managing director, Empower Wealth
“You’ve got to be on top of your remuneration,” he says, highlighting that while most aggregators will accept commission payment queries for unmatched or missing commissions, some groups may limit the time period in which you can do this.
Several other brokers have say that they systematically request their aggregator to look for unmatched commissions every six to 12 months, with money being found “every time” this request is completed.
The volume of commission found ranged from a few hundred dollars to tens of thousands of dollars.
Issues may also arise if there are administrative inconsistencies (for example, spelling mistakes or variations on the names used on the paperwork), which means commissions are not matched with the right loan.
But it’s not just missing money from the aggregators that is causing headaches - the much bigger problem is missing money from the lenders.
The net-of-offset nightmare
The most prevalent issue of underpayment uncertainty derives from a lack of consistency with the net-of-offset structure and how, and when, lenders calculate commissions.
All the major lenders, for example, have different time frames around the day on which they check the balance that the upfront commission is tied to. Some will calculate the commission to be paid on day four after settlement, others will check the balance seven days after settlement, and others 14 days.
They might do a second sweep, which again, will likely be on different time frames and be based on different calculations. Some of the majors might do a sweep at 12 months, for example, with some calculating the commission based on the highest balance across the 12 months and others taking the average balance. Others might do it monthly and calculate based on what’s been drawn down for that particular month (and deduct what’s already been paid). While some lenders will only look at doing another commission run if the balance has changed by over $20,000.
Worse still, some lenders take the stance that if offset funds are not utilised within the first 12 months, brokers won’t receive any commissions on that at all.
Plus, some lenders actually require brokers to send in forms to make a claim for commissions to be paid once the money has been utilised (but – as previously stated – there’s no way a broker can track whether funds have been utilised unless reaching back out and asking the client).
According to David McQueen, LMG’s group executive, risk and strategic partnerships, the net-of-offset commission change has seen broker remuneration drop by around 8 per cent.
McQueen says: “Brokers are probably just assuming they’re going to get paid if those funds are utilised and they’re not…”
What’s the solution?
McQueen says: “Sam [White, executive chairman of LMG], is very passionate about ensuring the brokers get their commissions.
“We would like to see standardisation on net-of-offset across the industry. We believe that there should be a standardised time when it’s paid across lenders. And we also believe they should remove the time restraints … If a lender is making money on funds in an offset after 12 months why does it mean that the broker is not being paid on that?
“We believe that should be standard and that the forms to request commission payments should not exist.
“We also believe that lenders should reduce clawbacks to 12 months and that there should be straight line amortisation.
“That’s the only way you’re going to get more consistency for brokers to understand how and when that money’s going to come in, because it has been a bit of a mess, to be honest.”
Christa Malkin, AFG’s state manager for NSW/ACT, says: “If the lenders had a standardised way of calculating commission that would certainly help the market with being able to forecast their remuneration better.
“At the moment, they’re all completely different and it’s one of the many challenges of our industry; that lenders are different in the way they approach things. Certainly, that’s something that we have ongoing discussions with the lenders about.
“There is a level of trust in the process … Most of these policies came into place after the royal commission, and most lenders are pretty au fait with getting this right now. But there’s always the chance that one gets missed. So it is good for brokers to build a process around it.
“Where the broker needs to put a process in place is making sure that – if they’ve had a conversation with a customer and they know those funds aren’t going to be utilised right at the very beginning – they know to actually follow up and just make sure that top up payment has been made.”
