FSCL case highlights clawback danger
A mortgage adviser has been forced to drop their request for a commission clawback following a dispute involving FSCL.
Thursday, July 29th 2021, 4:26PM 
4 Comments
by Daniel Dunkley
A case study published online by the dispute resolution service tells the story of two homeowners who successfully fought against a commission clawback after claiming it was unfair.
The two homeowners asked their adviser to arrange financing to fund a second home, refinancing their existing mortgage.
Their adviser told them to get a new mortgage from a second tier lender, as they could not meet the bank's stricter servicing test at the height of the Covid pandemic.
After a year, the homeowners refinanced with a bank, lowering their interest rates. However, they were hit with a clawback.
The adviser sent the homeowners an invoice for the clawback as the non-bank financing had been refinanced within two years.
The homeowners complained to FSCL about the $8,000 fee.
Upon reviewing the case, FSCL found that the adviser had given reasonable advice to move to a second tier lender last year.
It found that the adviser had properly disclosed the fee – but found the $8,000 figure "was too high for the work actually undertaken by the adviser in arranging the loan and refinance".
In an attempt to resolve the dispute, FSCL suggested the adviser slash their clawback to $4,000, "which would more reasonably reflect the actual work undertaken".
The homeowners were not satisfied, and did not agree to the terms.
The adviser then offered to lower the clawback to $2,000.
FSCL told the homeowners that this was a "good offer, given we would say the adviser was entitled to some of the fee, if we continued with our investigation".
The homeowners declined, and said they would only discontinue their complaint if the fee was waived entirely.
The adviser was forced to agree, and the investigation was closed.
Happening under the old regulatory regime, this dispute serves as a reminder for brokers to clearly disclose fees and clawbacks with clients and keep detailed records.
It is hoped that the new regime's increased reporting and transparency requirements will limit the number of future clawback disputes.
FSCL's view
The dispute resolution service called on advisers to clearly outline clawback terms at all times.
"If mortgage brokers/advisers want to recover the brokerage or commission clawed back by a lender from their former customers, they need to communicate this clearly.
"Ideally the fee and the circumstances in which it will be charged should be set out in plain language with an acknowledgement signed by the customer.
"We also expect to see some indication of the amount the customer can expect to pay and how the amount is calculated. Ideally, the fee should reflect the value of the actual work undertaken."
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Comments from our readers
Advisers should be asking the right questions up front regarding a possible early repayment of a loan in full and then they should decide if they want to act for these customers or send them in branch, what is the point in doing all the work for a loan that’s going to be repaid in full and incur a 100% commission claw back? And until the banks stop charging claw backs these types of deals are just not good business.
Anyway, some banks have in their adviser terms of engagement agreements that advisers must not enter into a Commission Claw-back Indemnity arrangement with a customer.
Checking around at current Adviser disclosure statements that belong to a certain large dealer group and I was a little surprised to see the following statements in all 12 I looked at (I stopped looking after 12 as it became apparent, they were all the same).
“’(b) When I have to repay commission to the lender. If a lender requires that I repay commission within 28 months of settlement of your loan, we may charge you a one-off fee. Any such fee would be no more than $2,500 (plus gst) and would be calculated based on a rate of $250 plus gst per hour of time spent providing our services and financial advice to you in connection with the applicable loan. The fee I charge you will not exceed the amount of commission I have to repay the lender. You will be invoiced for any one-off fee and will be given 30 days to make payment.””
Pretty negative stuff and possibly in breach of some bank’s adviser engagement rules anyway
This is surely self-defeating. If the cost of the work that is involved in completing a loan that turns out to be repaid within the clawback period is $2,500, how do you answer the question "what is the cost of the work that is involved in the same loan if it runs longer the clawback period?".
If the answer isn't the same ($2,500) how do answer the follow-up question - "why are the costs different when at the time you are completing the loan, you don't know if the loan will run beyond the clawback or not?"
But first a disclosure FSCL is my EDRS.
Did FSCL's approach here show a bias against the adviser? Some of us have always been worried that the EDRS will tend to favour the customer.
I know it's dangerous to comment on cases without complete information.
But based on the facts as I see them presented here, the adviser wrote a loan for the client and got paid by the lender.
The borrower repaid early, so the lender applied a clawback against the adviser.
There was a term in the advisers contract with the borrower client that if they repaid early, the adviser would invoice them for a fee. Now I don't know the details of how that amount would be calculated.
Surely FSCL should want to enforce the term of the contract as it was agreed at the outset.
If the boot was on the other foot, surely FSCL would not wanted to have told the complainant that they had to pay more than an amount stipulated in the contract.
Hence the claim of asymmetry against advisers.
FSCL's interference in the terms of the bargain made between client and adviser had the result that the adviser got nothing. Now I could be cute and say the adviser appears to have made that decision themself.
My guess is in the end the adviser cut their losses on the basis "you can't beat city hall"
My question is "is that how disputes resolution is supposed to work?"
If the answer is yes, then that is unfair to advisers.
Alongside the other fundamental unfairness that the adviser is required to adhere to the decision of the EDRS, but the client is free to ignore the EDRS decision and take their complaint to another (hopefully from the client's POV) more favorable jurisdiction.
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