A man who received a $2500 bill from his mortgage adviser after he refinanced his loan had the fee waived when he complained – but the industry says clawbacks represent a real cost to brokers that clients should understand.
The man asked his mortgage adviser to arrange a home loan for him when he moved in 2018.
In early 2020, he wanted to refinance to take advantage of low interest rates.
The adviser prepared a breakdown of the costs of refinancing for the client, but there were some delays obtaining offers from banks, as the adviser was particularly busy. The man approached another adviser who did the refinancing for him, instead.
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A few weeks later, he received a bill for $2500 from his original adviser, who said because the loan had been refinanced within 24 months of being issued, the bank had clawed back her commission. She was entitled to recover that from the client with a clawback fee.
The client complained to disputes scheme Financial Services Complaints Ltd (FSCL).
He said he received a copy of the mortgage adviser’s terms of engagement, but he had not realised the fee could be so large.
He thought the section of the agreement setting out the clawback was so vague that it was unfair for the adviser to try and enforce it.
He was also upset that the mortgage adviser had provided him with a breakdown of the costs of refinancing, but had not mentioned the clawback fee. He thought it was inappropriate for the adviser to tell him about his bank’s break fees, but not the adviser’s own clawback fee. He said that if he had known about the clawback fee, it might have affected his decision to refinance.
FSCL said the adviser was entitled to a fee but the terms of engagement were too vague to be enforceable.
“The clause did not set out how much the clawback fee could be, or how the fee would be calculated. It simply said that, if the client fully repaid their loan within 24 months, the adviser would be entitled to charge an early repayment fee. For all [the client] knew, it could be a $25 fee, as opposed to $2500.”
The adviser agreed to waive the fee.
Katrina Shanks, chief executive of Financial Advice New Zealand, which represents mortgage brokers, said clawback fees represented a real cost to the adviser which they were entitled to recoup from their clients.
When deals were done direct with banks, banks would sometimes claw back any cash contribution offered.
Sometimes, clients had to make changes to their lending structures which were outside the adviser’s control, or which they could not have predicted when the loans were set up, she said.
“We are one of the few if not only industries the effectively works for free for clients. The banks have a clawback clauses that effectively means that we can be clawed back our commission 100 per cent up to 18 months and then 50 per cent up to 27 months later.
“So if a client purchases a house does it up and sells it for hundreds of thousands more we are clawed back between 50 per cent to 100 per cent of our income depending on the timeframe.
“A solicitor potentially gets a double bite of the cherry as they have completed the transaction on the way in and on the way out on a sale. In our terms of engagement we have the right to charge a fee to the client. This is not in some cases even close to what the commission we have been paid. Maybe $1800 to $3000 depending on the complexity of the transaction. I some cases like a divorce or a death we choose to forgo the charge.”
He said it had become more common since banks had been offering cash to tempt borrowers to move their loans.
Bruce Patten, a mortgage adviser with LoanMarket, estimated up to 10 per cent of the industry would charge a clawback.
“But most don’t clarify it well enough. I don’t charge a fee, as I feel that if I haven’t done my job properly or if a client’s situation changes due to unforeseen circumstances, then that’s just the cost of doing business.
“We have also had advice from our lawyers that a fee can be charged, but it must reflect the level of work the adviser did not the amount they received from the bank to provide the loan. Therefore we set a figure to all our LoanMarket advisers as a maximum of six hours work and a maximum of $1500. This must be in writing to the client spelling out the maximum amount the client can expect to pay.”