An aggregator’s in-house lending division has introduced changes to its clawback structure it intends to enhance compliance and cultivate fairer results for the group’s network of nearly 3,000 brokers.
The changes are effective for Australian Finance Group (AFG)’s own lending products settled from today, 15 September 2020 and funded by AFG Securities.
According to Damian Percy, general manager of AFG Securities, the group has been looking to find a more equitable clawback model that “better balances the interests of brokers and lenders” for some time.
“Lenders will assert that upfront commissions should reflect the value that the broker delivers and must necessarily recognise that a loan that only lasts a year or two is, at best, a break-even proposition for the lender,” he explained.
“In contrast, brokers can reasonably argue that the arbitrary clawback ’cliffs‘ that exist today simply don’t reflect the fact that as time goes on the lender’s position improves.
“And there’s the reasonable question as to whether the prevailing structure is supportive of what the new mortgage broker best interests duty is seeking to achieve.”
When generating the revised policy, the team at AFG Securities concluded lenders recover their costs over time and clawbacks should diminish proportionately in the same way and called for recognition that a loan which discharges shortly after settlement was “arguably a poor transaction for all concerned”.
As such, the group’s new structure features a 100% clawback for the first three months, followed by a monthly, proportionate step-down for the remaining 21 months.
While Percy conceded “no clawback regime is perfect”, AFG Securities believes the updated policy presents “an appropriate and fair balance”.
“The step-down approach is, we believe, simple, reasonable and supports our brokers to meet their best interests duty,” said Percy.
“We think this incremental approach is far fairer than the current industry standard that can see brokers losing 100% of their commission for anywhere up to the first 12 months, even though the lender’s costs have been, at least partly, recovered.
“I hope other lenders will, in due course, recognise that the industry’s approach today needs work and follow suit,” he finished.