Aggregator agreements are evolving.
While Jon Denovan, partner with Gadens Lawyers, says they've always been in a state of flux, the next evolution will involve more than fixing up little loop holes.
"The next big round of changes will arise from the Commonwealth takeover of the regulation of credit and that will probably require most people to sign up new broker agreements."
Come 1 July the finance broking licensing in Australia will be run by ASIC and ASIC is going to be a much more active regulator than the state fair trading departments are, he adds.
"So if there's going to be a search light on intermediaries, which it sounds like there's going to be, you want to make sure that the bloke standing next to you hasn't got leprosy," he says. "You're damned by association. So make sure you're dealing with people of the highest ethics. If you choose wrongly you're in big trouble."
How to choose
At the end of the day, brokers join an aggregator to gain access to the funders.
Therefore it's only logical that the most important aspect of choosing an aggregator is its agreement with the funders.
"You need to ask, are the agreements between the funders and the aggregators good agreements or bad agreements?" Denovan says.
A bad funding agreement could say if any one broker commits fraud, the trail stops for all brokers.
"There are some aggregators who have gone to a lot of trouble to protect their members by negotiating long and hard with the funders so that can't happen."
Unfortunately, brokers don't have access to those agreements, so all they can do is ask or try to secure a warranty from the aggregator.
"Can you assume that all the aggregators have done it? I act for a number of the big aggregators and I know that they've done it, but I don't act for all of them. We were surprised recently to find that one big aggregator had not. They had just signed whatever the banks had put in front of them."
While the industry has gone through a period of dramatic growth, the wheel has turned.
"Funders don't need the aggregators quite so much. The distribution network doesn't hold the negotiating power any more," Denovan says.
"So if there are problems in the works, they're about to bounce out."
Not many people enter into marriage thinking about divorce.
But when signing up with an aggregator, brokers would be well advised to find out how easily they can exit the agreement before they sign the dotted line.
Stephen Moulton, partner with PricewaterhouseCoopers says there's more to aggregator agreements than commission rates and services.
"I think understanding what you're after is very important. I think people tend to go into these agreements looking to see how much money they can get out of it and not really about how they can really get out of it or if it's possible," he says.
Aggregator agreements have evolved over the years and 10-year handcuff agreements are few and far between.
But sticky points in agreements do exist and it's important to know what to look for.
"The issues about whether commissions are handcuffed or can you take your trail with you if you decide to change aggregators - that's critical," Moulton says.
Breaking an agreement prior to termination of a contract can result in the loss of trail income. Should brokers be involved in fraud or forgery the loss of trail is to be expected, but in other cases it's generally accepted that the broker has earned the income and should therefore get to keep it.
Some exceptions could be made however for brokers who receive leads from their aggregator. In this case, a new broker might choose to sign up with an aggregator who provides this service in order to keep deals coming through the door.
Also, brokers should be wary of verbal assurances by aggregators over certain clauses in the agreement. At the end of the day, unless a court can be convinced that the broker was unfairly coerced, the only thing that stands up in court is the document.
"Very often there will be a clause in these agreements which is called an entire agreement clause which says this is the entire agreements and any representations made prior to signing it have no impact or effect," Moulton says.
If you break your agreement and you believe you're entitled to trail, the best thing to do is try and negotiate with the aggregator first and go the legal route as a last recourse.
"There are cases coming up now in relation to whether or not your trail can be terminated, but I think the important thing to note is that you can spend an amount in legal costs far greater than the actual loss of trail itself. So you've got be very wary before you go the legal route," Moulton says.
"If you've got a good relationship with the aggregator you'd seek to have discussions with them about the possibility of being released. But ultimately it's a commercial decision that you have to take. If you've only been going for a year or two and your trail is not that significant, for a little piece of mind or better opportunity you might have to end up losing that trail to break the agreement."
Reading the fine print
There are a few questions brokers should ask before they sign the dotted line...
-Will you receive trail after your agreement terminates?
-Will trails continue if the aggregator becomes insolvent?
-Are you liable for borrower identity fraud, other fraud or forgery?
-Will default by another loan writer affect all trails?
-Is the aggregator licensed and a member of the MFAA?
-Does the agreement contain clauses allowing the aggregator to withhold trail to cover clawbacks by lenders?
-Does the aggregator segment brokers and what services will you receive based on your standing in the organisation?
Case study: PLAN Australia
CEO Ray Hair says PLAN Australia's agreement is very straight-forward.
"It's an ongoing agreement that the broker can end with 30 days notice." he says.
"The philosophy behind our agreement is that as a broker, it's your business, your customers, therefore you should be in control of that. If you breach our agreement then we terminate you. You still get your trail commissions. If you're unhappy with our services you give us 30 days notice and you can leave and you still get your trail income. So you don't jeopardize your trail income unless you breach the fundamental clauses of the lender agreement through fraud or negligence in which case none of us get the trail."
PLAN members are not strictly limited to selling their book to other PLAN members, but Hair says it is easier because of issues with the group's commission trust. But PLAN does have to approve of the purchaser.
"That's because they are now associated with PLAN and they will now be receiving trail commissions from us and we want to know that they are the proper person in that context. But other than that it's not limited solely to PLAN members."
Case study: Connective
The big selling point of Connective's agreement is that it allows brokers to really own their trail book, says Mark Haron, principle.
"It's quite clear what brokers get within our agreement structure," he says. "It's not dissimilar from the financial planning services industry. And we think with the focus on customer service, brokers that are truly servicing their clients should continue to get their trail no matter where they are. The ability to take that trail book with them is quite important."
Connective's structure also allows brokers to sell their books on that open market, rather than only another Connective broker.