One Royal Commission and plenty of debate later, the Federal Government has finally released new clawback regulations. We take a quick look at what it means for consumers and brokers.
After a Royal Commission, and much discussion and debate, the Federal Government finally released new clawback regulations in September. There are plenty of nuances to the regulations, but broadly speaking, the regulations are designed to ensure consumers receive transparent professional advice to make informed decisions about loan products. We took a moment to review what they mean for Brokers.
While the Finance Brokers Association of Australia (FBAA) and the Mortgage & Finance Association of Australia (MFAA), argued strongly for clawbacks to be removed entirely, the Government has reduced the maximum clawback period to two years.
So, what does this mean for brokers?
The new regulations ban clawback arrangements if they are in place for more than two years from the beginning of the credit contract. For consumer arrangements, this period begins on day one when credit is first drawn down, and for refinancing credit, it applies the first day after the refinanced credit is made available.
Importantly, the new regulation clearly states “the consumer must not be subject to an obligation to pay an amount as a result of an amount being required to be repaid under the repayment obligation”. This is significant as it will protect the consumer from additional charges when changing loans within a clawback period. But it does come with it’s own compromises for brokers.
The FBAA also raised concerns over proposed regulations to prohibit brokers from passing on clawbacks to customers. The Association noted this change could negatively impact the services brokers can deliver to clients “Whilst not a common practice, some brokers defer charging fees for service but reserve the right to charge fees for service if the consumer does anything to trigger the clawback”.
In line with legislative updates to clawbacks, the Best Interest Duty (BID) will also have an impact on the daily working lives of Brokers across the country. Taking effect in January 2021, the BID will ensure brokers keep comprehensive records of client interactions and apply a ‘best interests’ filter to loan recommendations – all in the interest of protecting the consumer.
Again, how are Brokers impacted?
For most brokers, good record keeping and quality customer service are standard. The BID simply requires them to log these efforts in more detail. Broker magazine summarised these obligations nicely in the October edition:
Explore the consumers requirements and objectives – not just what they tell you they are, but your assessment of what they should be based on what they are trying to achieve and what they value.
Broadly speaking the BID is ‘principles-based’ meaning mortgage brokers will need to determine themselves how they meet these obligations.
Well, there’s a long way to go until consumer, industry and regulatory interests align. But, change is needed and the pending regulation changes to clawbacks are a step in the right direction for the industry. We support the FBAA’s and MFAA’s position that more work is needed to support consumers and protect the livelihoods of brokers, and have no doubt the conversation will continue.
Where do we stand? We allow brokers to set their own commission and don’t include clawback provisions in any of our loan products. We believe in supporting brokers who work with us to make their own choices and back them to make the right choice by their clients.
There is a lot of stigma attached to short term lending. And with good reason in some cases. But, the reality is that almost every business at some stage will need access to finance – and that’s not something to be ashamed of. Short term finance can help businesses react to changing situations or take advantage of new opportunities.