Clawbacks are a 'financial blow' for brokers, says FBAA
As cashback offers crank up amid interest rate rises, the lure of fast cash is eating into brokers’ income and creating unwanted side effects for consumers, industry representatives say.
Concerns over the practice are on the rise, as the maximum cashback offer has now reached $10,000. Available through Reduce Home Loans, it beats ubank’s $6,000 cashback offer, announced on November 10.
With brokers now writing just over 71% of residential loans, a high portion of refinancing is conducted through the broking channel. Loans are increasingly being refinanced within a two-year period, resulting in the broker forfeiting part of the commission paid by the existing lender for writing the loan, known as “clawback”.
FBAA managing director Peter White (pictured above left) told MPA that cashbacks create increased due diligence for brokers, as they determine whether the offer is in effect in the best interests of the borrower.
Best Interests Duty forms part of a broker’s service, therefore cashbacks don’t affect brokers’ decisions and their recommendations to clients. This is why cashbacks are such a pain point for the industry, White said.
White acknowledged that brokers “doing their job” get paid half of what they’re entitled to upfront and “have someone with their hand in their pocket” for two years to take this off them.
“It is completely unacceptable and a dog act when lenders are giving away free (for no work done) many thousands of dollars in cashback incentives to borrowers which if the loan terminates in six months will not be taken off the borrower, and who will pay for these in higher interests one way or another,” White said.
He said brokers’ income was impacted by clawback and like other small business owners they experienced cash flow constraints.
“The impact is a financial blow to brokers’ cash flow where it triggers a clawback … this is unacceptable if you are acting in the best interests of the consumer,” White said.
Ultimately, White said consumers lured by cashback offers will pay for the cashback somewhere else.
“If the financial offer is outweighed by say a higher interest rate and costs/fees associated with the refinance being sought, then it may well not be in the best interests of the borrower to move,” White said.
White said the FBAA is currently working under the direction of Assistant Treasurer and Minister for Financial Services Stephen Jones on the financial impacts and fair remuneration of brokers, and the outcomes of lenders acting on clawbacks.
Part of the FBAA’s conversations and submission would include the impact of growing cashback incentives, versus the growing escalation and impact of clawbacks, he said.
Acknowledging the “proliferation” of lender cashback offers, Specialist Finance Group general manager Blake Buchanan (pictured above right) acknowledged that to-date, there had been limited discussion about the undesirable outcomes for brokers and consumers.
Industry-wide, cashbacks could have undesired consequences through reduced revenue, fewer competitors and higher margins, ultimately lowering commission and broker numbers, he said.
Broker feedback showed cashback deals contributed to “poor customer behaviors” and outcomes, Buchanan said. A recurring theme was that cashbacks incentivised borrowers to refinance more frequently, putting them at risk of being stuck with unsuitable products for longer.
“Clawback incidents also seem to be increasing across the industry which points to a general shrinking of loan terms, in-part due to cashbacks,” Buchanan said.
Buchanan referred to figures released by MFAA showing the value of residential loans settled reached $96.08bn over the June 2022 quarter, with 68% of loans facilitated by brokers. Comparing the June 2022 quarter to the June 2020 quarter ($53bn, 57% broker share), Buchanan estimates that even if 25% were added to account for property price rises (noting not all were purchases and property values have since declined), adjusted settlements could (“generously”) be attributed to $80bn.
“This indicates that at least $16bn (and realistically much more) in additional settlements are attributed to refinancing sooner,” Buchanan said.
Increasing cashback incentives could come back to bite lenders through shrinking loan terms and reduced profitability, he said. This could eventually drive up the cost of funds, making the lending less profitable.
“When we combine smaller margins/terms, higher costs of funds and the additional expense of a cashback, [we could expect to see] lenders look to either increase costs to consumers or reduce broker commissions (or both) to account for some of the lost revenue,” Buchanan said.
Feedback from lenders at a national level showed the “vast majority” disliked cashbacks and agreed that they were not good for the industry and should be cancelled, Buchanan said. But many indicated their hands were tied, as the decision was ultimately tied into application levels.
“The problem for most lenders now is that if they remove cashback incentives, their volumes drop significantly which is not usually a good look for shareholders, the board or other stakeholders. Therefore, some are now predicting that cashbacks are here to stay,” Buchanan said.
Louisa Sanghera, director and principal broker at Zippy Financial (pictured above centre) told MPA cashback offers were encouraging clients to move on a regular basis. Although Zippy Financial already repriced clients twice a year, a high volume of clients sought to be repriced now - and the compensation for all of this work was insufficient, she said.
“We have people settling on their mortgages and two months later, asking to be repriced … clawback needs to be looked at, and also the trail percentage, as the amount we receive is not enough to cover the work we are doing on constant repricing and switching,” Sanghera said.
Data on current cashback offers provided to MPA by RateCity.com.au shows the highest cashback offer is currently available through online direct-to-consumer lender Reduce Home Loans. Its cashback offers start from $2,000 for lending of $250,000 to $499,999 and increase proportionally based on the total loan amount. The $10,000 maximum cashback is for lending from $1,999,999 to $2m plus. Reduce Home Loans confirmed to MPA that multiple securities could make up the total loan amount.
A $6,000 maximum cashback offer, provided by ubank is the second highest currently available, available for loans above $1m. AMP Bank and Citi (NAB) are offering cashbacks of up to $5,000, and multiple lenders (ANZ, Suncorp Bank and Greater Bank, Defence Bank, St. George Bank, Bank of Melbourne, BankSA, People’s Choice and Police Bank) are offering cashbacks of up to $4,000 (Police Bank’s offer ends November 30).