Banks claw back lump sum mortgage payments

Advisers, banks discuss current practice

Banks claw back lump sum mortgage payments

Clawback on mortgage adviser commissions are a longstanding practice, however one adviser says that there are circumstances where clawbacks do not support advisers in giving good advice to clients.

An increase in loans being refinanced within a two-year period and cashback offers used by banks to attract new business and lower new lending volumes recently brought clawbacks into the limelight in Australia. Mortgage brokers over the ditch have noted that they act in their clients’ best interests (which is a regulatory requirement know as best interests duty or BID) and raised concerns that clawbacks were impacting their income.

Here in New Zealand, clawback terms differ widely between banks and NZ Adviser understands that the clawback period for discharged mortgages and lump sum repayments may be anywhere from 0 to 27 months.  

Elyce Peters (pictured above left), managing director of The Mortgage Girls, told NZ Adviser that she understood the rationale for clawback in circumstances where a mortgage was refinanced or paid in full. 

She is less supportive of a partial clawback being applied in situations where clients make a lump sum payment on their loan, a practice she believes has been an elephant in the room.

“For lump sum repayments, a lot of our advice is about trying to reduce their mortgage,” Peters said. “If clients are putting a $40,000 lump sum onto their mortgage because they’ve managed to save that over the year, I don’t feel that its fair that [advisers] get penalised for that.”

David Weusten (pictured above right), owner of Financial Service Providers NZ. said that he would like to see legislation requiring banks to disclose to customers who arrange mortgages through advisers that they were making a payment to the adviser on their behalf.

Loan documentation provided by banks to customers should specify to the customer that they are required to cover the payment to the adviser if all or part of the loan is repaid within a specified period, he said.

This would discourage any adviser from being tempted to churn business and would resolve current issues where clawback is applied without a client’s knowledge, Weusten said.

Weusten also believes that “commission” which refers to the payment made by the bank to the adviser, would be better expressed as “payment for professional services”. This acknowledges the compliance requirements advisers are required to meet and the services they provide to their customers, he said.

Clawback on lump sum repayments not passed on to clients 

Peters provided examples of where clawback of commissions had been applied in situations where clients had received an inheritance, won Lotto and sold investment property due to hardship, putting the money onto their mortgage.

She noted that multiple banks had charged clawback for lump sum repayments made by clients, which ranged from $6,500 to $10,000, and said that where mortgage repayments were increased, clawback was not applied. 

It is standard practice for advisers to explain clawback in their Disclosure Statement, and Peters said that while the reason for clawbacks was stated within documentation and explained to clients,  the wording used refers to cancellation or repayment of a portion of lending. 

“We generally don’t talk to clients about clawbacks in regard to lump sum payments … this is because we feel it’s about providing sound advice to help reduce their mortgage – it’s an ethical and moral decision,” Peters said.

Helping clients with their fixed rate review roll overs is gratifying and provides a great opportunity to check in and see how they are tracking with their financial goals, she said.

“If the client is making a lump sum payment, it’s because they have saved or someone has given them some money.”

Notification of discharge of mortgage considered helpful

Where a bank receives notification that a mortgage will be discharged, Peters said that it would be helpful if a process could be put in place on the settlement discharge form to notify the adviser or their aggregator by email.

A clawback may be applied anywhere from two weeks to months’ afterwards, generally too late for the adviser to take action, particularly in matrimonial disputes where there may be the opportunity to speak to the parties involved, she said.

“We have no problem with clawbacks on discharged mortgages, however if banks could notify the adviser when they receive the discharge, it would make the transition smoother for all involved,” Peters said.

Banks respond to concerns about clawback on lump sum repayments

In response to initial questions about the application of clawbacks, an ANZ spokesperson said that commission clawbacks were included in the agreement between the adviser and their clients and that they were “standard industry practice” across New Zealand.  

Advisers are encouraged to be “open and transparent” with clients about all of the details included in the documentation they provide, including any implications of repaying all or part of the loan early, the bank said.

A Westpac NZ spokesperson noted that a clawback period was included in the contract with the mortgage adviser to encourage setting up a loan agreement that “fits the needs of the customer” (including future lump sum repayments) and confirmed that the bank did not charge the clawback fee directly to the customer.

Westpac NZ also noted the requirement for advisers to provide disclosure to their customer around their remuneration at the start of the loan process and said that it was up to the adviser whether the cost of a clawback is passed on to their customer.

NZ Adviser approached each of the main five banks (ANZ, ASB, BNZ, Kiwibank and Westpac) asking them to clarify their position on clawbacks on lump sum repayments, and about notifying an adviser before a mortgage is discharged. 

Responses from each bank can be seen below. 

Clawbacks on lump sum payments discretionary - ANZ

An ANZ spokesperson said that significant payments made on home loans could result in a commission clawback from the adviser, however this was “at ANZ’s discretion”.

In reference to notifying an adviser before a home loan is discharged, the ANZ spokesperson said that ANZ did not notify advisers. This is not a common practice across New Zealand banks, and the main reason is to protect the privacy of customers, the ANZ spokesperson said.

“ANZ does not hold information confirming whether there is an ongoing relationship between a customer and an adviser,” the ANZ spokesperson said. “If we did notify an adviser, the customer may feel we had disclosed private information without their consent.”

Clawback on lump sum payments can be waived in certain circumstances - ASB Bank

A spokesperson for ASB Bank confirmed that the bank does apply a commission clawback for lump sum repayments, and said that the clawback amount is waived where it is under a certain threshold.

"There are other instances where we will waive the clawback, for example, on compassionate grounds or where it is fair and reasonable to do so," the spokesperson said.

The bank said that it was not aware of situations where clawback of commission for lump sum repayments would be a disincentive to providing good advice.

"Advisers are professionals who are trained to give quality advice and they must adhere to the Code of Professional Conduct for Financial Advice Services," the spokesperson said.

Where a mortgage is discharged in full, ASB Bank said that it wouldn't notify advisers of such a request from a customer.

"We leave it to customers to work with their adviser as required."

No clawback applies to lump sum payments - BNZ

BNZ general manager home lending Adam Ward said that the bank does not clawback broker (adviser) commission when a customer makes a lump sum payment on their home loan. 

Where a home loan is closed or discharged early, tiered clawback charges apply.

“A clawback only applies if the loan facility is closed or discharged before the agreed loan term expires,” Ward said.

Ward said that as a mortgage discharge occurred at the end of the process, instructions were generally received by the bank once the customer had already committed to go with another lender.

“Mortgage brokers have their own customer relationship management approaches and regular call programmes which play an important role in keeping in touch with the customer and regularly reviewing their plans, goals, and objectives,” he said.

Clawback cost estimate provided upon request - Kiwibank

A Kiwibank spokesperson said that the bank supports Kiwis to get debt-free faster. Customers who are looking to reduce their mortgage while remaining with Kiwibank can make additional payments without incurring a clawback charge, the spokesperson said.

Kiwibank encourages customers and/or advisers with customers considering leaving to reach out and the bank can give an estimate of costs to leave, including any cash clawbacks that may apply.

“The discharge process is often left to the last minute and there is limited ability for advisers or banks to retain customers at this point,” the Kiwibank spokesperson said.

Clawbacks support long-term relationships - Westpac

A Westpac spokesperson said that the bank believed its use of clawbacks helped to create longer term relationships with its customers and mortgage advisers, which “ultimately benefits all parties”.

“From our experience, the mortgage advisers we work with act on their customers’ best interests and advise them accordingly,” the Westpac spokesperson said.

Westpac said that its mortgage retention team reached out to customers intending to discharge their mortgage, to have a full discussion on how the bank could retain them.

“We don’t currently have systems in place to contact the adviser before the discharge takes place,” the Westpac spokesperson said.

Clawback a ‘commercial arrangement’ - Financial Markets Authority

In response to whether clawback practices had raised any concern, a Financial Markets Authority spokesperson told NZ Adviser that these arrangements were ultimately “a commercial arrangement between providers and advisers” and not a primary focus for the FMA.

Incentive arrangements between providers and advisers was not within the scope of the FMA’s  guidance on the intermediated distribution of financial products under CoFi, the regulator said.

More generally, the FMA noted that financial advice provider (FAP) licence holders and their financial advisers must meet their disclosure obligations.

“This includes disclosing fees and expenses connected with the giving of advice and explaining in what circumstance these might be payable,” the FMA spokesperson said.

Financial advisers must exercise care, diligence and skill when providing advice and are obliged to give advice that considers the client’s circumstances, the FMA said.

“Customers can go through their financial service provider’s dispute resolution scheme if they have a complaint relating to clawbacks.”

Former Financial Advice New Zealand CEO Katrina Shanks told NZ Adviser Talk in November that clawback continued to be an issue for advisers. Amid higher interest rates, increased refinancing, and stretched affordability, she said that clawback would not go away, noting that the industry would need to continue to work with lenders to create good outcomes.

Do you have any concerns about the application of clawback?  Is there anything that you think needs to be changed? Share your thoughts in the comments section below.