Understanding Clawback Provisions in Broker Agreements

Commission clawbacks are one of the most significant financial risks in running a mortgage advisory business in New Zealand, yet many newer advisers do not fully understand how they work until they experience one. At Chaperone, we think a clear-eyed understanding of clawback provisions, what triggers them, how they are calculated, and how to manage them, is an essential part of running a professional and sustainable brokerage.

What Is a Clawback?

When a mortgage broker arranges a loan for a client, the lender pays a commission once the loan settles. That commission is typically made up of an upfront payment, calculated as a percentage of the loan amount, and sometimes a trailing commission paid annually on the outstanding balance over the life of the loan. A clawback occurs when the lender recovers some or all of the upfront commission if the loan is repaid within a defined period after settlement.

From the lender's perspective, the commission is intended to compensate the broker for introducing and converting a long-term customer. If the loan is repaid or refinanced away shortly after settlement, the lender has paid for an introduction that did not produce the expected relationship. The clawback is the mechanism by which the lender recovers that cost.

How Clawback Periods and Calculations Work

Clawback provisions vary between lenders, but most operate on a sliding scale over a defined period, commonly 24 months from settlement. A loan repaid or refinanced within the first 12 months might trigger a full recovery of the upfront commission; one repaid between 13 and 24 months might trigger a partial recovery, often on a pro-rata basis. After the clawback period ends, the commission is generally considered fully earned and no recovery applies.

The exact terms are set out in your agency agreement with each lender, and it is important to read these carefully. Commission rates and clawback periods can differ across lenders, and they can be updated over time. Staying current with the specific terms of each lender agreement you operate under is part of your professional obligation and your financial risk management.

Common Triggers

The most common clawback triggers in the New Zealand market include clients refinancing to another lender within the clawback period, clients selling their property and repaying the mortgage, early repayment in full for other reasons, and in some cases significant lump-sum repayments that reduce the loan balance materially below the original amount. Refinancing is the most frequent scenario and deserves particular attention in your client conversations.

It is worth noting that not all refinancing reflects poorly on your advice. If a client's circumstances change and moving to a different lender genuinely serves their financial interests, facilitating that move is the right thing to do, even if it creates a clawback obligation. The key is acting in the client's best interests consistently, which is your regulatory obligation as an adviser, and managing the financial consequence through your business model rather than allowing clawback risk to compromise the quality of your advice.

Protecting Your Business

There are several practical approaches to managing clawback risk. Understanding a client's plans for the property before settling the loan helps you anticipate whether early repayment is likely. A client who has already told you they plan to sell in 18 months represents a higher clawback risk than one who is buying the family home with a 30-year horizon. Factoring this into your client pipeline management and cash flow forecasting is a sound business practice.

Many advisers also build a clawback reserve, setting aside a portion of upfront commissions for a period corresponding to the clawback window, before treating the remainder as fully available income. This approach smooths the cash flow impact of unexpected clawbacks and is a sign of a well-run business. Your financial adviser or accountant can help you think through the right approach for your business model.

Disclosure Obligations

Under New Zealand financial services regulations, you are required to disclose your remuneration arrangements, including commission structures and potential conflicts of interest, to your clients. Clawback provisions are part of that picture. Being transparent with clients about how you are remunerated, and that early repayment or refinancing has financial consequences for your business, is a professional obligation and builds the kind of trust that supports long-term client relationships. At Chaperone, we support advisers in maintaining clear, confident disclosure practices that protect both their clients and their businesses.