Blog, Business, Finance, Marketing, The Thin Green Line

The Thin Green Line: Conflict Priority Rule Versus Clawbacks

Kate McIntyre of MPA Magazine has written about a client divorce costing a broker $30'000' in clawbacks. Citing the experience of Louisa Sanghera of Zippy Financial, and Bernard Desmond of Blank Financial, Kate writes about the clawback of funds on the basis of life-events such as a divorce, and those that are a result of a poor-performing banks. On top of already drawn-out lender turnarounds and fuzzy best-interest obligations, the issue further exasperates the challenges faced by mortgage brokers ever single day.

While the circumstances of the clawbacks weren't discussed in Kate's article, the experience of Sanghera and Desmond are nothing new - they're occurrences that all brokers deal with on a daily basis- except for our clients (I'll explain why in a moment).

The initial comment I made to Kate's profile on LinkedIn was as follows:

This won't happen if an appropriate and full suite of post-settlement programs are in place. Contact, care, and BID, doesn't end with settlement (it's why we created EDGE). Errors and other circumstances aside, such as a divorce or an inheritance, a broker should *never* lose a client to another broker. Our own brokers are evidence that you can completely mitigate a clawback taking place. But it's getting harder.

The modern problem that we're dealing with, and it's an emerging issue the industry needs to address, is that products change shape as often as iPhones, so a borrower is less likely to entirely commit to a product (which might quickly become obsolete) for the duration of the clawback period - particularly when the persuasive refinancing message is so ubiquitous in modern marketing.

The only real clawback insurance these days falls back on creating and maintaining real client relationships.

In a follow-up comment to one of the fine folks an Nectar Finance, I wrote the following:

I've often said that brokers are a human condom the banks wear so they can screw their customers. The 'bank error' scenario in Kate's article proves this. I appreciate 'relationships' as a tool only extends so far, but they're still a last line of defence when the banks don't provide necessary support. In some cases, a self-inflicted tactical retreat is the only way of managing the situation; the issue is knowing how to communicate the ("how long will we let them screw us") timeline to customers, knowing exactly when the retreat is required, and then planning for the bank-induced self-mutilation in your business plan.

BID and any 'Customer First' promises are more than just a mere gimmick. I'd even argue that the conflict priority rule applies; there has to be a time frame until we weight the customer's interest against our own (and in favour of the client). The only solution, as Kate mentioned, is to have a provision in place to ensure when banks screw the pooch, the pooch goes on to live another day.

The damage done to a business when this occurs is far more than just a clawback - the value of a relationship, a bad review, future business, referrals, and so on, can't be measured in any meaningful way.

What followed wasn't expected: three brokers that weren't known to me called asking for help. Three! All had experienced similar frustrations with banks, and one had lost over $50k in a single month. There was really nothing I could other than provide technical solutions.

A quick call to my lawyer was met with a concerning conclusion: "the broking industry is f****d". As a lawyer that deals with brokers every day, and having dealt with him myself for over 10 years, I dug a little deeper into his own daily experiences and it wasn't pretty. In a conspiratorial and totally unexpected rant he claims that legislation was part of a longer-term plan designed to completely dismantle the broking industry as we know it. I recommended he lay down and have a BEX. While I don't agree with his overall sentiment, I did agree with him on certain points. In essence, the clawback system is stuck in a time-capsule despite the industry evolving in seriously significant ways. Bottom line: the clawback system has to change. The clawback period is the one single cancerous attribute that is responsible for multiple points of pain in the lives of brokers (and their clients).

First, what is the "Conflict Priority Rule"? Sourced from RG 273.144 , the conflict priority rule states that "[a]s a mortgage broker, you must prioritise the interests of the consumer if you know, or reasonably ought to know, when you provide the credit assistance, that there is a conflict between the interests of the consumer and the interests of [the broker]". Paragraph 3.28 of the Replacement Explanatory Memorandum states that "[i]n addition to the new best interests obligation, the new law also requires a mortgage broker to resolve conflicts of interests in the consumer’s favour".

The expectation mandated by legislation is one brokers have typically always lived by. So, the legislation itself is more of an arse-covering exercise to provide banks with a shield against their own misconduct, and it instead relegates blame for past malfeasance back into the broking community.

The question I have is as follows: at what point does that 'conflict priority' or 'best interest' obligation cease to exist? Certainly, if the client is experiencing any hardship as a result of their product after the loan is written, isn't the broker obligated to consider that 'self-inflicted' wound to their own remuneration in order to resolve the issue? It's this confusion that makes me consider the subjective BID as an entirely fuzzy expectation placed upon brokers because there's seemingly no clear answer. Yet to be tested in any serious way by a court, the implication is clear: the customer is a priority, regardless of consequences, but the longer-term implications of this requirement are disastrous since the evolution of banking products (or the maturity of client circumstances) will always create the availability of products that provide better client outcomes within the clawback period. This juxtaposition will continue to pose a serious and significant conflict burden on brokers as long as the BID and current clawback policy continues to apply post-settlement (and it does).

So, what are the expectations placed upon brokers to refinance a settled client during the first 2-years when the contract-free exercise has business-destroying consequences (since more appropriate products are now available)? I've always told my own clients (and particularly those in our Platinum group) that refinancing a client and keeping them happy is a better option that losing the relationship. But the banks have created an environment where their tech-style cycle of product evolution has now created a shorter-term BID obligation to consider banking alternatives... thus relegating the value of a mortgage broker - or at least the viability of a broking business - to the scrapheap. Clearly, if you refinance over and over you're operating as a loss-making charity. But this is what legislation and competing policies seemingly requires from you.

[Desmond] told MPA that the clawback system was posing problems for newer entrants to the industry and solo operators who didn’t have the time and resources to maintain strong client relationships over the 24 months following settlement.

I don't buy into the 'lack of time' comment. Perhaps Desmond should give us a call. Our EDGE post-settlement systems are industry leading, and of those that use the system it's resulted in clawbacks only on the basis of life-events such as a divorce or inheritances. It returns hundreds of millions a month by way of creating and maintaining a schedule of real human contact (please, stop thinking of email as a relationship-building program). As far as technology goes, EDGE is the closet you'll actually get to clawback insurance. Further, it operates to create real referral programs, so it's always returning more than it costs.

Desmond told MPA that "24 months was too long a period for clawback to apply given the current environment in which 'the banks themselves are promoting cashback culture.'" Further to Desmond's comment, and as as mentioned earlier, it's not just the cashback culture, it's the products themselves that will invariably become more competitive... or the product features will provide more opportunity. In essence, the banks are essential competing against brokers' best interest themselves. Further, the marketing industry has settled on a ridiculously hyped sales pitch in their Facebook advertising and elsewhere that tends to have client question their existing product or position (it works, but it's seedy... and the copy is often and usually in violation of the most basic advertising expectations). In engaging with infomercial-style advertising, brokers are essentially contributing towards an environment that is seemingly accelerating its own demise (finance advertising is generally of low quality, deceptive, and often non-compliant - we'll come back to this another time).

We agree with Desmond: a 24-month clawback period is untenable. Banks shouldn't punish brokers for unforeseen events, and they certainly need to recognise their primary supply chain and support the brokers that support their business.

As a marketing company our influence is limited. We provide EGDE software (a bigger part of the Yabber Suite ), and we continue to espouse the virtues of real relationship-based communication and support, but this may not be enough if current trends continue. Current legislation, and the rogue and unchecked behaviour of the banks, is seemingly a gateway into a broker free world as long as the clawback remains as it does. As an industry the whole clawback ecosystem the greedy banks use to punish their supply chain for no good reason has to end.

The industry needs to act now.

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