Clawbacks could sneak onto ComCom agenda
The vexed issue of clawbacks might form part of the industry meeting with the Commerce Commission over remarks that have rubbed mortgage advisers up the wrong way.
Tuesday, April 2nd 2024, 10:34AM 
5 Comments
by Sally Lindsay
Financial Advice NZ is leading a group meeting with the Commerce Commission over its recent report into banks.
Mortgage adviser Jeff Royle is part of the group and believes it will be the right time to “tack-on” a discussion about non-disclosure by lenders and how there is a simple remedy that will benefit everybody.
He has been vocal about clawbacks and the lack of disclosure by the major banks warning clients if they pay back their adviser originated loans early they may be up for other costs.
He says advisers are making slow progress on getting a warning in bank documents and now is the time to delve into the issue at a high level.
“Non-bank lender Reismac is leading the way, talks the talk and includes in its documents a one-liner that tells clients if they repay their loan early they may be in for other costs. Since Resimac has been doing that we haven’t had one nasty situation – we have had positive outcomes.”
Royle says it is such a simple solution to make borrowers aware they may have a liability when they approach their lender for early repayment.
The BNZ has also put a line in their loan documents and is sending Royle a set of blank documents so he can assess what the wording says. “We need a standardised clause that every lender can use so there is no ambiguity.”
He supports clawbacks – repayment or part repayment of commission if a loan is repaid to the lender within 27 months of it being taken out.
“It is the non-disclosure to clients about other costs and to advisers, who often have no idea until they get their commission statement, that a loan has been repaid early. They then try to bill the client for the lost commission and all hell breaks loose. It could so easily be fixed by one line in every lender’s loan documents so everybody is aware of where they stand.”
The Commerce Commission started a furore a couple of weeks ago when releasing its draft report into banking competition by claiming mortgage “brokers” are at risk of being “unduly influenced” by the commissions that banks pay them for placing mortgages.
Royle and a raft of other advisers made scathing remarks about the commission and its chairman John Small being asleep for the past five years when major changes to the industry were made.
No date has yet been set for the meeting.
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Comments from our readers
Its negative and if we keep heading down this track our customers will be disadvantaged as they can go direct to a branch for all their financial needs with no threat of commission claw backs for Mortgages and Insurance.
The negatives out way any positives.
Customers can choose to go direct to a bank branch and not incur commission claw back fees, banks and branches can then say : don’t go to an adviser, come to us as we do not charge commission claw back fees. Sold! Adviser industry is dead.
Charging a customer commission claw back fees and you won’t see them again or receive a referral from them.
You will have more chance of ending up in a dispute’s resolution claim paying fees and it can’t legally be enforced.
We should be encouraging the banks to stop commission claw back fees or reduce them as these are having an impact directly on customers and affecting their freedom to make informed decisions like re financing within a 27-month period which is anti-competitive.
The Australian Prudential Regulation Authority (APRA) has now determined that bank clawbacks of mortgage adviser commissions are prohibiting borrowers from switching banks which is causing some customers to be disadvantaged financially. Clawbacks are thus currently under review by the Australian regulator, and this should in time lead to a positive development for all mortgage advisers on both sides of the Tasman. Watch this space.
The regulations that govern disclosure of fees and conflicts of interest (such as commissions) could not be clearer - the duty of disclosure rests with the person who provides the financial advice, and has fees/COIs to disclose.
If a bank charges a client a fee for early repayment, the bank needs to disclose this. However, the bank is not invoicing the customer for the commission clawback, and so they have absolutely no duty to disclose this, any more than they have a duty to disclose to the client that the mortgage adviser will receive a commission if the loan is implemented. The duty to disclose sits firmly with the adviser/adviser business.
I have no doubt that "all hell arises" when an adviser sends a bill to a client to try and recoup commission clawed back by the lender. I also have absolutely no doubt that all hell breaks loose because the adviser did not discharge their disclosure obligations adequately at the outset of the engagement. I bet the "commission clawback" part of the disclosure was not covered, or was glossed over, or was too vague to meet the disclosure requirements. Decisions out of DRS providers confirm this.
The issue that needs to be fixed here is not solved by placing the client in the middle of what is fundamentally a problem with the relationship the mortgage adviser industry might have with the lenders. The problem is not that the bank is actioning a customer's request, it is that the first time the adviser finds out about the request is when a clawback appears on a commission statement. Could this be due to some lenders seeing mortgage advisers as a necessary evil, rather than a valued distribution channel? (Genuine question, not a rhetorical one.)
Anyway, disclosure that there may be a clawback fee charged for early repayment is not the responsibility of the lender, unless they are the one charging the fee. Anyone who thinks otherwise should re-read the disclosure regs until they are clear on this fundamental.
The mortgage adviser industry is littered with advisers who do not have adequate disclosure statements confirming if they can or will try and charge the customer potential fees and specifically what those fees will be for commission claw backs or other fees. Some advisers try and charge for just giving advice and some advisers even try and charge fees if the customer does not utilize the pre-approval they had via the adviser! I mean why would you want to use their services?.
A recent seminar given by a mortgage adviser in Wellington recently talked about how they can restructure your lending to reduce it faster but did not disclosure a $ 2,000 fee until the end of the seminar, checking the adviser’s website and disclosure statement shows no mention of fees being charged at all which is pretty misleading until you get to the end.
One large dealer group that has multiple advisers hiding under their FAP license puts a standard clause in their disclosure statements saying they can charge up to $ 2,500 for potential commission claw backs which in itself is vague.
Regardless of what an adviser puts in their disclosure statement they cannot enforce a customer to cover their lender commission claw back fees and would have to take them to court to get the money if the customer refused to pay.
If I was a new mortgage customer I just would not deal with any adviser that said “ I can potentially try and charge you commission claw back fees ‘,It’s just not positive and a bad reflection on our industry.
Where are FMA and Comcom ?
Vacant.
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And people keep saying we don't need CoFI.
It is because we have CoFI coming that providers are finally shuffling their feet, and advisers wouldn't have to call BS on this stuff if we had effective rules for providers.