What customers are complaining about

TMM checks in with the Insurance and Financial Services

Ombudsman to find out what customers are complaining about and how to address these issues.

BY SALLY LINDSAY

Complaints against mortgage and financial advisers have risen recently specifically in relation to fees and charges.

“In some of the cases the information in documents sent by mortgage brokers to clients isn’t sufficiently clear,” IFSO strategic partnerships manager Andrew Gunn says.

“Clawback fees are a big issue –where a mortgage or financial adviser hasn’t provided sufficient information about charging a clawback fee if the client decides to break their mortgage.”

Gunn says these fees need to be explained clearly. In some cases, the ombudsman has found they cannot be charged by the mortgage adviser. (See case studies below)

Advisers under FMA Regulations Code standard 3 are required to outline why the advice is suitable, given their client’s circumstances, and under Code standard 4 ensure their clients understand the advice, its benefits but also the risks, costs and fees attached with the advice.

In Rosewill Consulting director and compliance consultant Derek Mayne’s view this is not enough and mortgage advisers should have a standard client agreement.

“With regulation, the main point is making sure a client actually understands what they are entering into.”

He is not surprised by the jump in complaints against advisers. “It is a sign of the times, people have been put in stressful situations recently and it is easier for them to make a complaint which is probably a good thing.”

Mayne says mortgage loan repayments for many people have risen considerably and they are holding advisers to account for the advice they've been given. “Some advisers are starting to charge fees and their clients are pushing back a wee bit.”

He says mortgage advisers can avoid issues by ensuring they disclose details of fees clearly in a client document at an initial meeting with a client. He says all advisers should have their own client agreement form.

Key information about fees, including how a clawback fee is calculated and when it is triggered, should be clearly documented in the agreement to be signed by the client.

“Clients may not read all the documentation provided to them. Discussing the contract or documentation to draw clients’ attention to key provisions is essential.”

He says if information is given by phone/in person, it is also good practice to follow up the key points by email or letter. “Keeping detailed file notes of meetings and conversations can help advisers avoid future issues.”

Mayne has come across advisers emailing a client documents as their disclosure statement. “That's not good enough, they have to go through it with their client and explain every facet, including break fees at banks and any clawback fees, how they are calculated, is the fee fair and reasonable and how the client will be charged. Then the adviser has more of a chance of it being paid.”

He has seen difficult models of clawback fees with different amounts being charged if a mortgage is repaid within 12 months, 12-18 months and 18-27 months. “If it is spelled out clearly a client can see exactly what it is going to cost them.”

Detailed notes of any conversations with a client should be kept as this is a record of mortgage advice, Mayne says. “It's there in black and white, and the client sees what they're committing to. And then we expect the adviser to get that signed, or at least get an email from the client confirming their understanding. This should stand up as evidence if there is a complaint made.”

He says one of the biggest issues arises when an adviser’s client has a mortgage in place and another adviser comes along and says they can get a better deal for the borrower. The client is then moved from one bank to another and the new adviser doesn’t tell the borrower that potentially they are going to be charged a clawback fee by their initial adviser.

“Advisers have duty of care to say if they take the client away from their initial bank, there is the potential for a clawback fee from any previous adviser, potential for a bank break fee, and there will be costs involved. Some borrowers are just starting to push back on that.

Gunn says in this period of high and volatile interest rates it is important mortgage advisers document the interest rates discussed and can demonstrate these were brought to their client’s attention. It avoids problems.

Case study 1

With the assistance of a financial adviser, Mr and Mrs L arranged a one-year fixed term mortgage with their bank.

The agreement between Mr and Mrs L and the financial adviser stated that a clawback fee would apply, if the mortgage was discharged within two years of the settlement date. The agreement did not describe what a clawback fee was, or provide any mechanism for calculating the clawback amount.

The financial adviser received commission of $3,536.94 from the bank for arranging the mortgage. The bank reversed the commission received by the financial adviser, and the financial adviser then clawed back the commission from Mr and Mrs L, according to the agreement.

Mr and Mrs L refused to pay the clawback fee, because they said it was not explained to them when they signed the agreement and a one-year fixed term mortgage had been arranged.

Case manager’s assessment:

The case manager considered whether Mr and Mrs L agreed to the clawback provision and had to pay the amount of $3,526.94.

The agreement between Mr and Mrs L and the financial adviser stated it was a binding agreement. The financial adviser said he gave every client a copy of the agreement and warned them to read it before they signed.

There was no disagreement that Mr and Mrs L signed the agreement. However, Mr and Mrs L said they were told it was a “usual contract” and they needed to sign it before they could start. They also said the agreement, and the clawback provision in it, were not explained to them prior to signing. In addition, they were only given a copy of the agreement after they had been invoiced for the clawback fee and had complained to the financial adviser.

In Mr and Mrs L’s case, the financial adviser was in control of producing the agreement, including how the clawback provision was drafted and presented in it. He was also in control of the process for explaining it to customers, or ensuring his staff properly explained it to customers.

The case manager discussed this with the financial adviser. She told him there were issues with the agreement, because the clawback fee provision was towards the end of the document, did not define what a clawback fee was, and did not provide a mechanism for Mr and Mrs L to calculate what the clawback amount might be.

After further communications, the financial adviser offered to reduce the amount Mr and Mrs L were required to pay to $1,150.

Mr and Mrs L accepted this offer, and paid the financial adviser $1,150, in full and final settlement of their complaint.

Case study 2

Summary: Ms B’s complaint was upheld, because the contract did not allow the financial adviser to charge a fee.

Mrs B signed a contract for a financial adviser to source a home loan for her. Sometime later, when Mrs B refinanced the loan the financial adviser had sought for her, the financial adviser sent her an invoice for a “cancellation clawback” fee. Ms B said she would not pay the fee, because it had not been disclosed to her.

Case manager’s assessment:

The contract said Ms B “agreed to the option(s) indicated above” (none of which were selected). It noted, “if service fee is selected” and if the product/service was cancelled within 24 months, she agreed the financial adviser could “recover its costs” by charging her a “fee ... to recover the cost of time spent by the adviser and administration staff, and any medical examinations that are required.”

Because the Service Fee box was not ticked, Ms B did not agree to pay the fee set out the in the contract. However, even if the Service Fee box had been ticked and Ms B had agreed to pay the fee, the case manager did not believe the financial adviser would be able to charge the clawback amount. This was because the contract referred to a “fee ... to recover the cost of time spent by the Adviser and administration staff, and any medical examinations that are required.” In order for the financial adviser to legitimately charge the clawback amount, it needed to be more accurately related to the time spent by the adviser and administration staff.

The IFSO Scheme’s view is that clawback clauses need to adequately give the customer a way of estimating the fee they will pay. For example, by providing the maximum percentage of the loan they will be charged, or some other method of calculation.

While it can be difficult to provide the figure which the customer will be charged, the financial adviser was in control of the systems and procedures which would allow the customer some way of estimating how much the fee could be. In addition, from 15 March 2021, under the Financial Markets Conduct (Regulated Financial Advice Disclosure) Amendment Regulations 2020 (“the Regulations”), Part 2, Schedule 21A, the financial adviser is required to inform clients of any fees or charges payable, or that may become payable – as soon as he knew details. If he failed to do so, he would be in breach of the regulations.

As there is no documentary evidence that Ms B agreed to pay the fee or was given any details about the fee, the financial adviser was not able to charge the fee.

The IFSO’s recommendation

The financial adviser requested a recommendation and made the following points:

1. He was an honest, hardworking financial adviser, who had lost faith in the systems which were meant to be there to protect him;

2. He did more than 40 hours’ work and he deserved to be paid (i.e. charge the fee);

3. Ms B lied in her submission and the IFSO Scheme considered this to be irrelevant;

4. Ms B was financially irresponsible and he cleaned up the mess;

5. Ms B agreed to pay the lender’s break fee, so he questioned why he was unable to be paid; and

6. His documents were compliant at the time and Ms B was using the wording to wriggle out of paying a financial commitment.

The IFSO noted the financial adviser had not provided any new evidence which would change the decision. The fact was that the contract did not allow the financial adviser to charge the fee. The IFSO noted Ms B had also complained about the financial adviser subsequently breaching her privacy, by posting about her loan on social media.

This was in breach of the financial adviser’s obligations under Code Standard 2 “Act with Integrity” and Code Standard 5 “Protect Client Information”. The IFSO noted Ms B was able to take her complaint to the Privacy Commissioner, or the Financial Markets Authority, if she chose to do so. ✚