Mortgage brokers will see upfront commissions reduce, and say hello clawback

The waves of change brought about by the Hayne Royal Commission has finally broken upon the shores of mortgage brokers. The government has introduced a draft bill based on the recommendations made in February this year. Mortgage brokers will experience unprecedented changes to their remuneration frameworks.

The National Consumer Credit Protection Amendment (Mortgage Brokers) Bill will change how mortgage broker incentives are earned. Implementation is planned for 1 July 2020, less than a year away.

The Bill will address conflicts of interest in mortgage broker remuneration. It will require mortgage brokers to act in the best interests of consumers when providing credit assistance.

Changes to mortgage broker benefits

  • The bill proposes that mortgage brokers will have their upfront commissions tied to the amount being drawn down. This replaces the upfront commission based on the loan amount. This means the incentive will relate better to the borrower’s ability to repay.
  • Soft-dollar benefits (infrequent benefits) will be capped at $300.

Benefits that will be banned

  • Volume-based benefits. These are benefits dependent on either the number of credit contracts or the total amount of credit available or drawn down.
  • Campaign-based benefits. These are benefits dependent on providing or entering credit contracts during a particular period. 

Benefits that will not be banned

  • Education or training that is for the professional development of the participant. This includes any travel and accommodation relating to the course and any events or functions held in conjunction.
  • IT software or support related to the provision of the credit service to consumers.
  • A non-monetary benefit given by the consumer.

Changes to mortgage broker clawback

Clawback requirements will apply to any monetary benefits given to a licensee (e.g. mortgage broker) or representative in relation to a consumer credit contract.

The repayment obligation (amount to be clawed back) is for all or part of the benefit if the consumer is in default or the credit contract is discharged.

Clawback requirements

  • The clawback period will be no more than two years from the date the credit contract is entered. A longer clawback period adds to the cost of switching products. Therefore, only a two-year period is required such that mortgage brokers and consumers explore new and better loans.
  • Clawback amounts will not exceed the benefit given to the licensee/representative.
  • No clawback expenses will to be passed onto consumers.

GA Comments

We do not expect large impacts to the mortgage broker industry. The main upfront commission will be shifted to the amount drawn down, which would suggest stronger credit contracts (less likely to default or be discharged) moving forward.

There may also be an increase to the base salary of mortgage brokers to compensate for the loss of incentive payments.   

­The exposure draft bill and regulations can be found HERE . You will also be able to submit responses and feedback for the bill up to the 4th of October this year.

© Guerdon Associates 2024
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