Financial Service Complaints highlighted complaints by consumers over claw-back commission as a concern in its annual report for 2014/2015.
Consumers had complained after being asked to pay the mortgage adviser claw-back fees when they cancelled their finance after a short period of time, saying the disclosure documents were unclear or buried in the document.
"We agree it is reasonable for an adviser to be paid for the work involved in arranging insurance or finance. However, the fee must be reasonable and based on the adviser’s actual time, expertise and level of service provided," the report stated. "We have found that disclosure documents do not always adequately explain what might happen if a customer cancels the insurance or repays finance within a short period of time."
The Professional Advisers Association
(PAA) CEO Rod Severn
told NZ Adviser
communication is key with everything related to advice and best practice with commission clawback is to communicate in writing and verbally explain any upfront or potential fees to consumers, which he says many advisers already do.
"Current disclosure guidelines are not overly straight-forward and have led to some pretty complicated and lengthy disclosure documentation, which is ultimately not helpful for the consumer," says Severn.
"Simplifying disclosure is a key area that the PAA is working on with MBIE as part of the FAA review. More straight-forward guidelines in terms what needs to be disclosed and how, will help advisers implement best practice disclosure and mitigate the risk of this type of issue where clawback of commission is passed on to client."
"Communicating clearly before any potential clawback on commission, mitigates the chance of clients getting a financial shock, which can be harmful to the relationship and importantly, their perception of advice."
Severn says if there is any indication that an adviser's client is less than clear about the detail, it is important to review their Disclosure Document and make any necessary changes so there is no room for confusion.
"There is no hard and fast rule about how much commission clawback an adviser should pass on to a client," says Severn.
"But there is a very real and reasonable expectation that the client be fully aware of what that would be, and how it is determined."
The New Zealand Financial Advisers' Association (
NZFAA) general manager David Yates told NZ Adviser
it's up to the adviser to make clear the implications of client actions in relation to the financial advice they are being given, otherwise the clients have every right to dispute any unexpected fees.
"Our view is that the currently legislated disclosure obligations are inadequate and, for RFAs, in particular they provide very little information from which the client can make an informed decision about the advice they are being given," said Yates.
"For AFA's the information is too comprehensive to the point that the regulated statements become ineffective in conveying salient information for a client to make an informed opinion.
"We believe (and this seems to be a universal view) that the disclosure obligations need to be simplified, standardised and highlight salient information about the nature of the adviser service to facilitate informed decision-making."
To reduce the chance of unwanted claw-back disputes, Yates says advisers can make sure the client is fully aware of any clawback provisions through:
1. Including any clawback provisions in the written scope of service/engagement.
2. Specifically highlighting clawback provisions at the time the client signs the scope of engagement.
3. Asking the client to initial the clawback provisions to show that they have seen, understood and acknowledge that particular provision and
4. Ensure that a copy of the signed scope of engagement is provided to the client as soon as is practicable after signing.
5. Ensuring that the basis on which the fee is calculated is appropriate. It is not generally acceptable to use the value of any commission lost as the basis of calculation. Rather it should be based on the amount of work undertaken by the adviser in relation to the engagement.