Joanna had been Samantha’s mortgage and insurance broker for years.
In February 2012 Joanna brokered Samantha’s home loan finance.
In May 2013 Samantha asked Joanna to review her insurances. They exchanged a number of emails and in June 2013 Joanna met Samantha and asked her to sign a terms of engagement. The terms of engagement advised, under the heading ‘How we get paid”: “I may charge a fee if the insurance policy is cancelled within the insurer’s claw back period on commission paid.”
Joanna placed insurance on behalf of Samantha and received a commission payment from the insurance company.
Towards the end of 2013 Samantha decided to sell her house, repay her home loan and use another broker to arrange the lending for her new house.
In February 2014 Samantha advised Joanna that her financial circumstances had changed, she could no longer afford the insurance and intended cancelling the policies arranged the previous year. Joanna advised the insurance company would claw back the commission paid, and Joanna would have no option but to recover the clawed back commission from Samantha. The commission claw back for the insurance was about $6,000, and the commission claw back relating to the home loan repaid early was $1,500, a total of $7,500. Samantha could not afford $7,500 and did not think Joanna had the right to charge it.
In an effort to resolve the complaint Joanna reduced the amount to about $800, but Samantha did not agree to pay the reduced amount and referred the complaint to us.
Samantha said she did not know that if she repaid her mortgage, or cancelled her insurance, within two years she would need to pay Joanna a fee.
Joanna said the terms of engagement stated she could charge a fee if an insurance policy was cancelled within the insurer’s claw back period. Joanna explained she had previously absorbed commission clawbacks, and considered it reasonable for Samantha to pay her for the considerable amount of work she had done on Samantha’s behalf.
Generally a broker is paid by the lender or insurer, but if the finance or insurance is cancelled within a relatively short period of time the value of the business to the lender or insurer is reduced. Under its agreement with the broker the lender or insurer will recover some or all of the commission it previously paid to the broker. The broker may then look to their customer to recover all or part of the loss.
We agree it is reasonable for a broker to be paid for the work undertaken in arranging insurance and mortgage finance. However, the fee must be a reasonable fee based on the broker’s actual time spent and expertise.
We are concerned that broker’s disclosure documents do not always adequately explain what might happen if the customer cancels the insurance or repays the finance within a short period of time. In this case we found the line “I may charge a fee if the insurance policy is cancelled within the insurer’s claw back period on commission paid” was inadequate. The clause was buried under an unrelated heading, contained jargon and failed to give the customer any understanding of what the fee could be or when it could be incurred.
We expect to see disclosure documents containing information about fees:
- written in plain English, avoiding jargon
- under a clear heading
- based on an hourly rate, with the broker keeping a record of the time involved arranging the product
- stating a maximum amount that could be charged
- including advice about when the fee will be incurred.
Part way through our investigation of this complaint Joanna contacted our office and advised she had changed her mind, and wished to resolve the complaint with Samantha. Joanna agreed not to charge Samantha any fee for cancelling the mortgage finance and insurance. Samantha was happy with the outcome.