24th July 2008
MFAA Update - Fees charged by Brokers
Prepared by Jon Denovan - Gadens Lawyers
Used with permission
Many brokers are becoming confused about the fees they can charge borrowers. As commission levels paid by lenders are cut, brokers are becoming increasingly concerned and many brokers are looking at ways they can charge borrowers directly for services provided. However, how brokers can do this and still comply with the myriad of finance broking laws in the various states and territories of Australia is a question that is being asked more and more.
It is important to note that consumer bodies get extremely concerned when brokers are receiving commission from both lenders and borrowers - regardless of the legislation in any particular jurisdiction. As well as ensuring that commissions received from borrowers comply with the legislation in their particular state or territory, brokers must take care to ensure that they are not receiving unconscionable or unreasonable amounts of commission in aggregate from all sources.
Interest Rate Caps
Legislation in NSW and the ACT prescribes a maximum annual percentage rate in respect to all credit providers and products regulated by the UCCC. Similar draft legislation has been introduced in Queensland (although this legislation has not yet been passed).
The effect of this legislation is that the maximum annual percentage interest rate, including all interest charges and all credit fees and charges which may be charged by the lender must not exceed 48% per annum. It is important to note that this existing legislation does not cover additional fees and charges charged by brokers - even if such fees and charges are paid out of the loan proceeds.
However, brokers should be aware that there are proposed amendments to the UCCC in all states and territories which, if implemented, may mean that any fees paid to third parties "in connection with the provision of credit" will be taken into account in determining whether the maximum annual percentage rate limits have been exceeded.
These proposed amendments are not just mere speculation, there is currently draft legislation which proposes that such a law will be implemented in respect of "short-term credit", however, there are also suggestions that these proposed amendments will be expanded to apply to all credit. If this occurs, all fees and charges paid to a broker will be taken into consideration when calculating the "maximum annual percentage rate" allowed in stages where interest rate caps have been imposed, adding further pressure to any fees contemplated by brokers.
Finance Broking Legislation
Brokers are reminded that the MFAA Code of Practice requires brokers in all states and territories to disclose all commission paid to or from a broker, regardless of who has paid the commission.
In addition, brokers must ensure they comply with all finance broking laws in their state or territory.
(a) Brokers must provide borrowers with a Finance Broking Contract (FBC) in the prescribed form when arranging UCCC loans irrespective of whether they are receiving commission from the lender or from the borrower.
(b) There is no limit on the amount of commission that may be charged by brokers, however, no commission may be demanded, accepted or received from a borrower until the credit has been approved by a lender.
(a) Although the law appears to require an FBC only when the borrower pays the commission, Consumer Affairs Victoria considers that an FBC is required to be entered with the borrower irrespective of who pays commission. The MFAA recommends that its members enter into an FBC with all borrowers, regardless of whether an FBC is required by the particular state legislation.
(b) There is no limit on the amount of commission that may be charged by brokers, however, no commission must be received from the borrower unless either:
(i) the borrower "accepts" the credit that is actually obtained; or
(ii) the credit negotiated is reasonably comparable to the credit specified in the FBC.
(a) An FBC is required only with the person paying the commission. Where only the lender is paying commission, the FBC is comprised in the Origination Agreement and no FBC is required with the borrower, however, the MFAA recommends that its members enter into an FBC with all borrowers, regardless of whether an FBC is required by the particular state legislation.
(b) The maximum commission which may be charged or received from a borrower is the greater of:
(i) in respect of the first $5,000 of the credit, not more than 2% plus GST;
(ii) in respect of the portion of the loan exceeding $5,000, not more than 1.5% plus GST; or
(iii) $6.50 plus GST (see s.35 and regulation 4).
(c) No commission may be demanded, accepted or received from a borrower until the credit has approved by a lender.
(d) There is no limit on the commission that can be charged to or paid by lenders.
4. Western Australia
(a) An FBC is required with the borrower irrespective of who pays commission.
(b) There are limits on the total amount of commission received by the broker (i.e. commission paid by the lender plus any commission paid by the borrower) as follows:
(i) If the lender is a "Credit Provider" - the maximum commission (for loans other than equipment and personal finance) is:
(A) 2% of the loan amount upfront; and
(B) 0.5% p.a. of the average outstanding loan balance "from time to time" trail.
A "Credit Provider" is:
(A) a person regulated under the Financial Services Reform Act (i.e. an AFS Licensee) or regulated by APRA (i.e. an ADI); or
(B) a licensed credit provider in WA (licences are required by lenders who do not hold an ASFL and who provide consumer credit in WA); or
(C) a person who is registered as a financial corporation under the Commonwealth Financial Sector (Collection of Data) Act 2001.
(ii) If the lender is not a "Credit Provider", the maximum commission (for loans other than equipment and personal finance) is:
(A) up to $500 for loans under $25,000;
(B) 2% of the loan amount upfront for loans over $25,000 paid by the borrower and 1.5% paid by the lender; and
(C) trail 0.5% p.a. paid by the lender.
(iii) The maximum commissions for equipment or personal finance is:
(A) upfront from either the lender or the borrower (in aggregate), $800 for loans up to $10,000 and thereafter 8% of the loan amount;
(B) trail payable by the lender of 0.5% per annum.
(iv) The maximum commission prescribed for "Total Mortgage Management": 8% of interest collections.
(c) There may be a written agreement between the borrower and the broker which specifies the time when commission is payable, otherwise commission is payable upon the loan being obtained (except where failure to obtain the loan was the fault of the borrower).
5. South Australia
(a) There is no requirement for brokers to provide borrowers with an FBC in South Australia; however, the MFAA recommends that its members enter into an FBC with all borrowers, regardless of whether an FBC is required by the particular state legislation.
(b) In South Australia, the Criminal Law Consolidation Act (SA), regulates disclosure of commission paid to "agents". Because of the wide definition of "fiduciary" in the legislation it is likely that brokers will be caught by this legislation and must therefore disclose:
(i) the nature of any benefit (i.e. commission) obtained);
(ii) the value (or approximate value) of the benefit; and
(iii) the identity of the third party from whom the benefit has been or is to be received.
6. Queensland, Northern Territory and Tasmania
(a) There are currently no requirements for brokers to have FBCs in these states and territories (although the MFAA recommends that its members do so) nor are there any limits on commissions payable to brokers in these states.
General law considerations
The general law (also called the common law) imposes a duty of care on finance brokers. The level of duty of care will depend on the relationship between the finance broker and the borrower.
It is desirable for all finance brokers to enter a contract with customers, or at least give a disclosure note to customers, specifying:
(a) the level of disclosure which will be adopted; and
(b) the duty of care which will apply.