With lending competition on the rise amid rising interest rates, brokers have been reporting an increase in cashback offers by lenders incentivising new mortgage products.
Indeed, the increased competition at a time when borrowers’ finances are stretched has led to record-high volumes of refinancing exacerbating the longstanding issue of broker remuneration clawbacks.
As borrowers switch lenders to get a better deal or cashback offer, brokers are having their upfront commissions paid by the lender clawed back (when it falls within the first two-year period of a new loan).
The issue has garnered the attention of government, with the Assistant Treasurer Stephen Jones MP asking for calculations around the costings of clawbacks (to ensure lenders aren’t profiting from them) and association leaders calling for action.
In a move to address the issue, founder of non-bank lender and mortgage manager of Mortgage Ezy, Peter James, told The Adviser it was abolishing clawbacks from all of its products.
“The time for clawbacks has well and truly passed,” Mr James said.
All products under the lender’s Ezy Program, such as old doc loans, expat loans, self-managed super fund, and prime loans, that are securitised by a warehouse facility, will no longer be covered by clawback, effective from 1 April 2023.
“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,” Mr James said.
“Most brokers face 100 per cent clawback if the loan discharges within 12 months, and 50 per cent after that.
“So when you’ve got a situation where 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.”
According to the Finance Brokers Association of Australia (FBAA), the cost of clawbacks for brokers between 2018 and 2021 surged by 47.4 per cent, from $10,229 in 2018 to $15,077 in 2021.
Mr James said that has grown exponentially, with the cost doubling to a broker’s business.
The removal of clawbacks is building momentum with Pepper Money announcing earlier this year the removal of clawbacks for its commercial mortgage lenders products, with residential mortgages “constantly under review” and La Trobe Financial has long held the position of no clawbacks on its lending products.
Indeed, clawbacks were introduced to eliminate brokers churning business, however, given the stringent ‘best interests duty’ and associations banning memberships if such actions were to take place, it’s not an issue in today’s market, Mr James said.
In fact, banning clawbacks “encourages brokers to act in the very bests interest of clients”, he added.
“Secondly, in most cases, brokers are aligned with lenders because they receive a trial commission and so they’re not going to be churning loans to get a new upfront commission,” he said.
He added that it’s very time-consuming for both the broker and the client and it involves costs.
“Most brokers are very content to build a trial income and keep the clients with the current lender as long as it’s in the best [interests] for the client,” he said.
Furthermore, most brokers will generally go back to that lender and ask for a rate reduction to retain the client, if the lender’s rates have increased well-above market rates, he said.
Indeed a growing issue is around ‘loyalty tax’, where the lender does not drop its rates for existing clients.
Mr James said this is “contrary to what we’re trying to achieve with the whole best interests duties”.
He added clawbacks can have the unintentional consequence of influencing brokers to pursue a certain action.
“I’m sure that the vast majority of brokers would resist that if it’s not in the best interests of their clients. But we really need to act in the spirit of the legislation, I believe, and clawbacks are one impediment, that could be seen as a temptation for brokers, to perhaps not see things clearly in the client’s best interests as they should,” he said.
Given the extraordinary competition between the major banks for market share, Australian Finance Group’s (AFG) latest mortgage and competition index found major lenders had taken market share from their non-major rivals.
The report found major lender lodgements were up 2.2 per cent to 61.8 per cent — the highest level since the final quarter of 2020, while mortgages overall fell.
Reiterating these findings, Mr James said while lending had fallen overall, the fall was further for non-bank lenders.
“Business for purchases has dropped completely off and unfortunately the remaining business is mainly cannibalising each other’s lending books,” he said.
“So while it looks like perhaps banks are down 30 per cent and non-banks 50 per cent, in fact it’s much worse than that, because we’re refinancing each other’s books.
“It’s a zero-sum game the amount of loans from purchases has dropped off the map.
“Non-banks have lost ground because predominantly raising their funds from depositors, whereas non-banks are raising their money from the professional markets.”