Earlier this year, Assistant Treasurer and Financial Services Minister Stephen Jones met with members of the broking industry to discuss clawbacks and net of offset commissions. Minister Jones was joined by Finance Brokers Association of Australia (FBAA) managing director Peter White AM, aggregators, and leading FBAA brokers from across Australia.
Clawbacks remain one of the more contentious discussion points in the broking industry
While the minister did not outline any specific actions from the meeting, he reportedly asked the FBAA to put together a list of top priorities and outcomes they want to see brought about.
According to White, this was “the first time the industry at large had ever met with a relevant federal minister to specifically discuss clawbacks and other important issues at such depth.”
Clawbacks remain one of the more contentious discussion points in the broking industry. Many believe the mechanism, first introduced to help manage and mitigate broker churn, now adversely impacts brokerages that operate as small businesses in their own right.
As brokers continue to feel the pain, some non-bank lenders have taken the bold step of removing clawbacks from their products or revisiting their clawback structures.
Not so easy
Removing clawbacks isn’t as simple as flicking a switch, however, especially for bigger lenders such as the major banks. Last year, then National Australia Bank (NAB) CEO Ross McEwan told an audience of brokers at the LMG Growth Summit that any wishes to remove the structure would likely result in a reduction to brokers’ upfronts.
“There’s a pie that contracts and expands over a period of time. And one of the pieces of that economic pie is where you spend your time and money putting [mortgages] on the books (and I spend a lot of time and money putting it on books),” McEwan said.
“We pay a commission load on that and we’ve all spent money. And if you don’t have a clawback on it, you’re going to have to take some less on the upfront because the pie doesn’t get any bigger. It actually gets smaller over time with the margins get contracted. So, you’ve just got to think about it as there only being one pie and how we divvy the thing up.
“The more you mess around with [clawback] – or think: ‘I don’t like clawback’ – well, just think: ‘Where does the money come from?’ And that’s the piece we just need to get our minds on.”
Thinking differently
But that doesn’t mean the clawback issue is a closed case. In recent years, several non-bank lenders have flagged their intention to remove clawbacks from products or revisit their clawback structure to offer brokers more favourable payment structures.
Earlier this year, non-bank lender Resimac announced it would be removing all clawbacks on its specialist full doc and specialist alt doc products.
Speaking to The Adviser, Resimac general manager, distribution and marketing, Chris Paterson, explains with specialist loan products, customers are looking to transition into a prime loan as quickly as possible.
“[The reason] we removed clawbacks is if the customer is looking for a prime loan within the clawback period, the broker doesn’t lose,” Paterson says.
“We wanted to have the broker not be impacted by the client looking for a prime option if they leave Resimac.”
Paterson says customers would often get a broker’s help with a specialist mortgage, only to refinance to a prime loan as soon as they could.
“This isn’t a great outcome for the broker, whose upfront commission gets clawed back if this happened within the first two years,” Paterson says.
“Our strategy is to offer a diversified product range to support brokers.
“Data shows more customers are turning to brokers to find product solutions that suit their needs, if they’re specialist customers looking to transition to prime, they can do this at Resimac, or without the broker being penalised with clawback.”
Last year, self-employed non-bank lender RedZed also revealed a new clawback structure that took the number of months a loan has been active into account, applying a diminishing scale to determine the amount of clawback payable.
Adrian Fisher, RedZed head of distribution and product, tells The Adviser the decision was prompted by industry feedback.
“For some time now, industry associations and aggregator heads have been seeking a fairer clawback structure for their members,” Fisher says. “However, the issue has been compounded of late by the recent spate of bank cashback offers and lender incentives, which have significantly increased the number of broker commissions being clawed back.
“Many brokers have either lost customers to other lenders or brokers, or have been required to rewrite loans with no guarantee of new net revenue.” Mortgage Ezy was another non-bank lender to abolish clawbacks on products under the lender’s Ezy Program, such as old doc loans, expat loans, and prime loans that are securitised by a warehouse facility.
Peter James, Mortgage Ezy founder and executive director, tells The Adviser he thought the time for clawbacks had well and truly passed.
“We see no need to keep punishing brokers, especially in today’s environment where borrowers are being encouraged actively to refinance their loans through a fistful of cashback,” James says.
“Most brokers face 100 per cent clawback if the loan discharges within 12 months, and 50 per cent after that. So when a client has been offered $6,000 or more dollars to refinance, and they’re struggling financially, that can be a huge temptation for them to go to another lender.”
Level playing field
So, how would a world without clawbacks work? Assetline Capital provides one model.
The non-bank lender has never imposed clawbacks, but rather an establishment fee to cover the costs of the distribution channel. This fee is absorbed into the loan amount, meaning there is no cash flow pressure on the borrower or the lender.
Assetline Capital national head of sales and distribution, Royden D’Vaz, says the lender believes in investing in brokers’ success, not penalising them.
“We believe brokers deserve to be fairly remunerated for all the work they put into the original loan. They can’t claw that time back. If a client has a change in circumstances, their broker shouldn’t be penalised,” D’Vaz says.
Watch this space
As the mortgage industry continues to evolve, competition becomes even more important. Non-banks continue to play an important role in fostering this competition by thinking outside the box and delivering products such as loan products without any clawbacks.
Having the opportunity to work with progressive lenders such as non-banks, which offer an alternative to these mechanisms, can only be a good thing.
