Australian borrowers who refinance within the first two years of taking out a loan might ultimately hurt their brokers due to a clawback system set in place by a recently passed legislation.
Louisa Sanghera, director and principal broker at Zippy Financial, said this clawback system under the Best Interests Duty Bill allows banks to force brokers to return their commissions should clients refinance or repay their loans within the first two years.
"Of course, we have no control over what clients decide to do once the transaction is completed, yet, we end up essentially working for free if they change lenders or repay their loans within the first year or two," she said.
Sanghera said the system's transparency is also flawed, given that it does not require banks to provide evidence before taking away broker commissions.
"Clawbacks were introduced prior to the royal commission and have always been a bad policy in my opinion," Sanghera said, "Now it is set to become law with the only beneficiaries being big banks. Brokers are generally small businesses, and it is completely unfair that we are seemingly expected to work for free."
The bill, which amended the Credit Act, requires brokers to act in the best interests of consumers and addresses the issues surrounding commissions.
Loan Market executive chairman Sam White said while this is a welcome change, further clarity from the regulators is still expected.
"What brokers do need to do is to translate what's currently in their heads or on notepads, into a file that enables anybody to see that the broker has complied with, both the spirit and the letter, of this new law," White said in a report in Australian Broker.