Common broker practise now outlawed: Anna Porter

EXPERT OBSERVATION

The prevalent practice of property investment firms sharing undisclosed kickbacks amongst the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW. 

The conflict of interest frequently arises when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller. 

As such, this puts the broker into a position by which they are being paid on both sides of the fence. From the activities the undertake on behalf of the buyer and again from the filter down of fees from the seller. Until now this has been a grey area and there was nothing stopping this practise. 

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.

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. Which will be a full Diploma course as of July. 

Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a Corporation’s license under the ACT. Subsequently, every transaction that they receive a referral fee from they will be putting their license up against the transaction and taking full liability for the conduct, practises and outcome of that transaction, ever if they have little to do with the transaction, they are a party to it financially and therefore take as much risk as everyone else in the transaction.

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.

Assuming in some circumstances a broker may also hold a real estate license, under the legislation this raises issues around the ethics of receiving fees to act on the buyers’ behalf as their broker but then receiving a fee from the property firm who get their fees from the seller or developer.

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 Porter is the founder of Suburbanite. She is a property valuer, investment adviser, property market commentator and author of Whistle Blower.