Commercial brokers have been put on notice their credit licence will be at risk if they are complicit in continuing to direct clients to business lenders with suspect practices.
Ahead of the government's NCCP Phase Two legislation that will regulate credit for small business, the industry has been warned lender practices such as 'fee fishing' and 'equity theft' will be targeted.
Brokers who are either consciously extorting clients or unaware of these lender practices may be at risk.
"There are those that are complicit, and those that are naive and are not aware of these practices," Semper Capital's Andrew Way told Australian BrokerNews.
"If they are complicit they should be put on notice: if a lender is prosecuted for fee fishing or equity theft and a broker has been involved with them on a serial basis, their licence is at risk," he said.
'Fee fishing' involves a lender putting out a letter of offer - including significant fees which are disproportionate to the lender's cost of due dilligence, under a charging clause - without consideration for providing a loan. The client is then liable for fees, sometimes into the tens of thousands, whether or not a loan is provided.
Equity theft is similarly dubious, occurring when business lenders knowingly set conditions that will send clients into technical default, allowing them to pursue recovery at a higher rate of interest.
Semper Capital's Way said ASIC may implement a process of registration for these lenders prior to regulation and licensing. Any lender who lends to business secured against real estate will be required to register with ASIC, Austrac, and potentially an External Dispute Resolution scheme.
The regulatory changes set to shake-out the commercial lending area follow similar requirements that have already been implemented in the residential and resi investment areas.
"A lot of good brokers see their clients ripped off, often by another broker is responsible for introducing the loan, " Way told Australian BrokerNews. "Most people find it difficult to see how a lender can justify charging tens of thousands of dollars in fees when there is no real consideration for providing a loan," he said.
Way said brokers also need to think about how much is reasonable to charge these commercial clients.
"There is the danger.How much can a broker charge - can they charge 2%? If they do, then their commission may be higher than my net return over the loan period [at Semper Capital] and I am the one taking the risk," he said.
Way said fee fishing and equity theft practices by lenders must stop, and that brokers who put their interests before those of their clients are at risk of losing their licenses.