The quiet practice of sharing undisclosed kickbacks amongst the supply chain involved in development sales will be outlawed in July this year in the NSW Jurisdiction.
Property commentator and valuer Anna Porter of Suburbanite welcomes the reform and says conflicts of interest frequently arises when a mortgage broker, accountant or financial planner receives part of the commission from the seller, while their client is the buyer.
“Some mortgage brokers, accountants and financial planners are being paid on both sides of the fence. Until now this has been a grey area and there was nothing stopping this practise.”
Ms Porter says that, for decades, property investment firms have been recommending off-the-plan properties to investors and receiving commissions or kickbacks from developers, and passing those on to referrers.
“Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year,” Anna Porter said.
New property industry reform Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year and will prohibit this practise, unless the broker or referring partner also holds a real estate industry license.
“Under new laws, if the referrers are being paid by the buyer for a service (for their mortgage broking, financial planning or accounting services), they can not also act on behalf of the seller or receive a fee from the seller. That would be a conflict of interest and as the fees filter down from the developer/seller, this would be in breach of the legislation.”
“Some well-known mortgage broking firms openly admit to receiving $5,000-$10,000 per referral in their pocket. This is effectively a conflict of interest as the buyer is a client of the brokers, but the fee that comes down from the investment firm is from the seller – the developer.”
Ms Porter says the legislators have identified that if these parties are getting a significant part of the fee, they are proactively being involved in advising the client and they may be compelled to utilise firms within their referral network based on fees and not based on the fundamentals of the advice.
“The referrers often don’t vet the investment firm’s properly, or just don’t care of the quality of advice being offered, they simply shop around for an investment firm purely based on the fees on offer.”
“If these advice providers also hold their own real estate licenses and go through the appropriate education and are held to the same ethical responsibilities, the legislators believe that the referrer can better identify if that property firms approach or offering suits the client they are referring. It’s intended to stop brokers, planners and accountants being compelled solely by fees and commissions; often secret commissions in our experience.”
“So, if a referrer does hold a real estate license, and does receive a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.”
Anna called this practice out in her book “WhistleBlower” published over a year ago.
“Finally, the legislation has caught up with this underhanded practise,” Ms Porter says.