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Brokers stare down barrel at dramatic change

Under proposed legislation you would not be entitled to fees

by Graham Reibelt, Former NSW President

For the past 18 months, the NSW Department of Fair Trading has conducted a review of the Credit (Brokers Act) 1984. The Finance Brokers Association of Australia (FBAA) was one of 14 parties to make a submission. There is real concern about the direction the review has taken.

In May, the department’s final report detailed options for broker regulation. If adopted any broker who does business in NSW will be staring down the barrel at dramatic industry transformation.

Recent media articles have portrayed brokers as vultures waiting to prey on unsuspecting clients. The Sun Herald (July 14, 2002) focussed on "scams" pulled by brokers and ASIC’s review of the industry. Any reader would have thought that broking was in disarray and teeming with shady operators.

Report opts for negative licensing

The NSW report rejected full government regulation, self-regulation and the implementation of a mandatory code of practice as options to regulate brokers.

However, it showed a preference for negative licensing. This means the department will not intervene until there are sufficient complaints about a broker. It’s like police giving drivers licences to anyone and then saying a person can’t drive if they are caught breaking the law a few times. This will not foster responsible, ethical business practices and is not supported by the FBAA.

The report recommended that brokers must

• Have a trust account or have fees paid direct to lender or valuer.
• Enter a contract before negotiating with a lender.
• Disclose details of commissions and the method of calculating it. This includes commission from both the client and the lender.
• Disclose the relationship with the lender. The broker must detail any other financial or other benefit he or she may receive from the lender.
• Not charge up front fees.
• Obtain a loan that matches the terms of the contract, or there is no guarantee of being paid.

Brokers at risk of non-payment

Concerning statements for brokers in the report included:

• "The Act prohibits a finance broker from being paid commission before the credit is secured for their client. The postponement of payment may pose an indirect cost to brokers, in that the broker’s time is expended and expenses may be incurred in advance of reimbursement being received."
  
• "Where the client withdraws from the transaction before credit is secured, the finance broker cannot claim reimbursement for work already done.
• "Finance brokers are prohibited from being paid commission where the credit secured is for an amount less than specified, at a rate of interest or charge greater than specified, or for a term less than the term specified in the contract."

Not being paid ‘a feature of business’

There is a risk to the broker that, if the credit secured differs slightly from the contract, the broker may lose ommission. This risk of not being paid was considered by the steering committee to be a feature of any business.

Under the proposed changes brokers would not be entitled to receive fees if interest rates change from when the client enters a loan contract to the time of settlement. This is because the terms of the loan that settled did not match the contract.

It is unbelievable that a government department would willingly legislate that a broker would not be paid after having provided an acceptable service to a client. It is almost unconscionable that the department would then go on to say that not being paid is "a feature of almost any kind of business operation".

One proposal is to give borrowers access to a low cost Fair Trading Tribunal with the power to review loan transactions. Brokers will not have access to this tribunal. If a client fails to pay, it’s up to you to take it to court or write off the debt.

This tribunal could also determine the fee you should charge on any transaction. That means you can enter into a contract with a client and agree on, say, a 1.5% brokerage fee. If the client later complains to the tribunal it can determine what fee you should have charged and order a refund. Submissions were also made asking for a broker to have the right to charge a "termination fee" if the client withdraws from the contract before settlement.

Cowboys still ride high

The Department of Fair Trading claims that one of the prime reasons for reforming the Act is to get rid of the ‘cowboys’. I defy anyone to show how the proposed changes will do that. The department now expects to have the new Bill before Parliament by the next session. In coming months, the FBAA will be closely involved with Fair Trading in discussions regarding the final Bill.

Graham Reibelt is the NSW President of the Finance Brokers Association and a director of Oasis Mortgage Group Pty Ltd. www.fbaa.com.au

Links

The Department of Fair Trading’s review of the Credit (Brokers Act) 1984 can be downloaded at:
www.fairtrading.nsw.gov.au/pdfs/secondarymenus/financebrokers.pdf

A copy of the Credit (Brokers Act) 1984 is at:
www.austlii.edu.au/au/legis/nsw/consol_act/cba1984200/

Source: Mortgage Professional Australia, Issue 2.8, August 2002