Clawbacks and clarity

Youness had his mortgage adviser help him arrange a home loan when he moved in 2018. The adviser found him a suitable loan, and Youness moved into his new home without any issues.

In early 2020, Youness wanted to refinance to take advantage of particularly low interest rates. So, he approached his mortgage adviser again. The adviser prepared a breakdown of the costs of refinancing for Youness, but there were some delays obtaining offers from banks, as the adviser was particularly busy.

Youness, unhappy with the delays, approached another adviser. This second adviser helped Youness arrange the refinancing. Youness thought that was the last he would hear from his original adviser.

However, a few weeks after Youness’ new mortgage was settled, he received a $2,500 invoice from his original adviser. The adviser told Youness that, because Youness had refinanced his mortgage within 24 months, the bank had revoked the adviser’s commission, so the adviser was entitled to recover the commission from Youness by charging him a clawback fee. 

 

Dispute

Youness said he had been taken entirely by surprise by this $2,500 clawback fee.

Youness acknowledged that he had received a copy of the original mortgage adviser’s terms of engagement, and that the terms said the mortgage adviser could charge an early repayment fee if he refinanced his loan within 24 months. However, Youness said his mortgage adviser had explained the fee to him, and Youness had no idea the fee could be so large. He thought the section of the agreement setting out the clawback was so vague that it was unfair for the adviser to try and enforce it. 

Youness was also upset that the mortgage adviser had provided him with a breakdown of the costs of refinancing, but had not mentioned the clawback fee at all. He thought it was inappropriate for the adviser to tell him about his bank’s break fees, but not the adviser’s own clawback fee. He said that if he had known about the clawback fee, it might have affected his decision to refinance.

 

Review

We spoke to the mortgage adviser and raised some concerns. We said that the mortgage adviser was entitled to charge a clawback fee, but we had concerns that the clause of her terms of engagement regarding clawback fees was too vague to be enforceable.

The clause did not set out how much the clawback fee could be, or how the fee would be calculated. It simply said that, if the client fully repaid their loan within 24 months, the adviser would be entitled to charge an early repayment fee. For all Youness knew, it could be a $25 fee, as opposed to $2,500.  

In our view, the adviser’s terms of engagement did not show that Youness had meaningfully agreed to the fee before engaging the adviser’s services. 

 

Resolution

The mortgage adviser took our comments to heart, and agreed to waive the fee for Youness. She said she would use this complaint as a learning opportunity, and make some changes to her terms of engagement to ensure they were clear for other clients.

Youness was very happy with this outcome. He was glad to have the fee waived, and was encouraged to see the adviser was making changes to her terms.

 

Insights for participants

Financial advisers are entitled to be paid for their work. When a loan is refinanced within the first two years, the bank will usually claw back their commission, and this is a substantial cost to the adviser. An adviser can recover this cost from their client, but they need to be able to show that the clients agreed to the fee before they engaged the adviser’s services.  

An adviser’s right to charge a clawback fee will always come from their contract with their clients – usually their terms of engagement. Because this contract is the basis for the adviser’s right to charge a fee, the contract needs to be very clear about how the fee will be calculated, and when the fee might be incurred. 

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