Xavier Quenon was recently presented with a conundrum. After lining up finance, he was asked by the client if they should revisit him every six or 12 months to refinance and take advantage of another great cashback offer.
According to the principal at Go Mortgage Corporation, this request is becoming more and more common as customers take notice of the growing number of cashbacks offered by the banks.
But this presents a conflict for the broker, who stands to lose money in the form of a clawback from the existing lender – and who may even earn less in commissions from the new deal than the customer receives through the cashback offer.
Are cashbacks in the best interests of the consumer?
With 29 lenders in the market now offering incentives of up to $4,000 when refinancing with them, it is no wonder consumers are taking notice – especially those who have been impacted by COVID-19.
But, while the extra cash may be a boon for some borrowers, refinancing to another loan product may not work within their best interests.
Connective executive director Mark Haron said there are a range of things brokers need to consider when determining the cost efficiency of moving into a loan.
“Just because it has an initial cashback offer, it may not mean that that is the best loan for the customer,” he said.
“I’ve seen one circumstance where a customer did pursue it and the other bank refinanced them. They ended up cross-collateralising all their security, moving completely away from the strategy that the broker had them on and ended up in a more expensive structure – not necessarily because of the product they refinanced to but because of the overall package. The broker had to go back and explain all that to them to make the customer understand that getting a few thousand dollars upfront was not going to be beneficial in the mid to longer term.”
The importance of documentation
With best interests duty coming into effect in just over a month’s time, the conflict brokers are facing because of these cashback offers looks likely to intensify – the remedy of which is thorough documentation.
“The straight answer is that brokers must put the customer’s interests ahead of their own,” said Haron.
If the new product will save the customer money and provide a better fit for their goals and objectives, the broker must prioritise this over their own interests, even if it means enduring clawback, he added.
“They have a choice of either not moving ahead with it and stepping away from the customer or acting in the customer’s best interests – if that is truly in the customer’s best interests,” he said. “Find out all the facts. It could be that the product might be more expensive in the long run for them.”
In any case, documentation is crucial, he added.
“Even if the customer chooses not to proceed, make sure you are still documenting it and holding that information on file,” he said.
The ramifications for not doing so could be massive; placing the broker at risk of a legal dispute if the customer doesn’t go ahead with the refinance based on the broker’s advice.
“You don’t have to be completing a transaction for a best interests duty necessarily to apply,” he said. “If you don’t proceed, they can scrutinise whether or not during that enquiry phase you’ve been acting in the customer’s best interest.”
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A lose-lose situation for brokers
For Quenon, this places brokers in a lose-lose situation that amounts to working without pay. The work brokers are required to do to get a deal over the line has been steadily growing in recent years while commission size has decreased.
Needing to document whether a refinance is in the customer’s best interest takes time – the result of which means the broker loses their upfront commission and earns a new commission that could be less than the total loan size due to net of offset.
The broker is also no longer able to pass on this loss of income to the consumer.
If the broker says ‘no’ to a customer’s request to refinance during the clawback period, it is likely the customer will go elsewhere to transact the deal, leaving them subject to clawback without the new commission to offset their loss.
“Some brokers feel obliged to do it because, if they don’t, they lose the customer,” he said.
But if they do refinance within the clawback period, they effectively work without getting paid for it – and the situation is due to no fault of the broker, who is the only one that actually loses out financially.
“There’s something wrong in this system,” said Quenon. “If the broker’s the one left with the bill because the incentive comes from the lenders, that’s not OK.
“There’s still rhetoric out there that points back to the broker, that brokers refinance every two years just to get a commission. Well, we don’t – and here we’re now having to refinance sooner, being clawed back because of what the banks put on the table.
“If we were doing that with all our clientele, we’d go broke.”
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Haron said it is not sustainable for a broker to refinance clients who are repeatedly coming back year after year to pursue a cashback offer.
“Brokers always have the right to say: ‘no I don’t want to do business with you’,” he said.
“From an industry perspective there’s a lot of push to have a more graduated clawback proposal as opposed to significant 100% clawback in the first year. It’s not the brokers that are creating this churn and higher turnover of loans. It’s the lenders, through pursuing business with these cashback offers, that are creating this customer behaviour.”
Haron added there have been discussions with the regulators to make sure they understand the challenges that brokers face because of the nature and structure of clawbacks.