Net of offset – "brokers are being done over"

Aggregators need to call out the bad behaviour of lenders that are shortchanging brokers through the Net of Offset ruling, according to senior broker Stephen Dinte. He told MPA that since the regulation was introduced in September last year, brokers had been subject to an “ad hoc application of the legislation” that had resulted in “dire situations.”

“When the regulation came into effect in September last year, the regulation had a stipulation in it about calculating the maximum payment to a broker,” he said. “There is a whole section in the regulation that explains how it’s done, but there was no prescribed minimum or prescribed methodology for lenders to apply it across the board.

“Now we have a situation where the various lenders apply different methodologies to determine the way they’re going to pay this net of offset and quite often this is to the detriment of the broker.”

The net of offset ruling was introduced as part of a package of reforms by the Combined Industry Forum (CIF) in response to the ASIC review into broker remuneration, the ABA’s Sedgwick report and the Hayne banking royal commission, according to AFG general manager industry and partnerships Mark Hewitt.

“The intent was to remove the perception that customers could be encouraged to borrow more than they required,” Hewitt told MPA. “The package of reforms proved critical in the Government supporting the current upfront and trail remuneration structure after Hayne recommended a shift to a customer pays model.”

Dinte said while this was introduced as a tradeoff to keep upfronts and trail commissions alive, it had effectively punished brokers in certain situations even though they had acted in the best interests of their clients.

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“For example, one particular lender has applied a five-day way of determining net of offset,” he said. “On the fifth day after settlement they compare the loan and the offset and pay commission on the difference, with no review. So, if the client has not drawn all of that money out of their offset account within those five days a broker doesn’t get paid any commission on that amount that is sitting in the offset.”

A common example is if a client refinances their loan and gets an additional $200,000 deposited into their offset account in order to build a granny flat. Given the time it takes to complete such a project, it’s highly unlikely they will take the full amount out of their offset within five days. This results in the broker being paid a commission on $200,000 less than the loan size they organised for the client.

“During COVID we’ve had times when the construction industry has been out, they haven’t been able to do any work,” said Dinte. “Therefore the broker, having done the work and complying with their best interest duty in assisting the clients to get what they are looking for, the broker gets chipped out of the full commission that they are rightly entitled to.”

Other lenders apply 14 day, 20 day and 30 day review periods, while some will make a second commission payment to the broker after reviewing the situation 12 months later.

“My gripe is that the regulation doesn’t stipulate that should be done and so many unscrupulous lenders are taking advantage of that to the detriment of brokers, effectively robbing them of income that is rightly due to them,” he said. “Unfortunately, the brokers have got no come back.”

Dinte recently lost 60% of the commission he was rightly entitled to on a $1 million loan because the lender in question had deposited the full loan amount into the client’s offset account by mistake. Due to the way NOO was applied by this lender, the client had less than five days to withdraw the full amount and deposit it into the bank account that it was intended to go to. Daily withdrawal limits meant the client was only able to withdraw $400,000 before the end of the five-day period and Dinte was thus only paid a commission on that amount.

He went to the lender BDM but was told that that was the policy in place.

“She said despite having similar complaints from brokers, she had taken it to her head office, but the request to pay the broker fell on deaf ears,” he said.

He then took the issue to his aggregator BDM who said they were aware of it, had spoken to the lender in question before but had had no success in getting them to review the policy.

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Dinte has spoken to countless other brokers who have been impacted by loss of income through no fault of their own. He said best interests duty meant that since the broker was required to put the customer’s interests above their own, if the client wanted to refinance with an additional amount deposited into their offset account, and the best lender for them happened to be the least favourable to the broker in terms of the way it applied NOO, the broker had no choice but to suffer a reduction in income on the deal.

“In discussions with senior member of the industry, I’ve been told that it’s not something that politicians, APRA, ASIC or Treasury want to get themselves involved in,” he said. “I honestly believe this falls squarely at the feet of our aggregators.

“There’s no one broker who if they stopped dealing with a lender would impact one iota on the profitability of that lender. Aggregators on the other hand, do make a big difference. It’s up to the aggregators to call out lender for their bad practice of ripping off brokers.”