When are your clients, your clients?

The Court recently determined that borrowers are mutually clients of the funder, the brokerage company and the sub-broker because of the ongoing relationship and the commission split. All information is therefore gathered for the mutual interests of those parties.

It is therefore imperative that your agreement with your brokers clearly sets out who owns the clients and the client information, and any restraints on dealing with the clients post termination.

However, mortgage originators / brokerage companies can rest assured that their client lists can be safeguarded through restraint of trade clauses after the decision in Home Loan Experts v Nassif Isaac [2017] NSWSC 1077, so long as this is clearly set out in your agreement.

Who do clients belong to?

The sub-origination agreement prevented the broker from taking the brokerage company’s client list and soliciting work from them after termination. There was no definition of client in the agreement, and the Court considered the relationships involved to determine who owned the clients and what clients were protected.  

Justice Sackar noted that a person who borrows money using a broker is properly the client of the broker, the brokerage company and the lender, because of the ongoing relationship and the commission split. The clients’ information is therefore gathered and recorded for the mutual commercial interests of each of those parties.

In this case, commission payments to the broker ceased on termination. As a result, the broker no longer had an interest in the clients. Thus, the Court concluded that all of those borrowers were and remained clients of Home Loan Experts.

The case could have had a very different outcome if the broker continued to receive commission after termination. That can be avoided by making sure your agreement properly defines clients, who owns the clients, and clearly sets out the restraints.   

How long can the broker be prevented from dealing with the clients

You must be able to establish that the restraint that you include in your agreement is reasonable to protect your legitimate business interests. The necessary protections will be impacted by many factors in your business – the amount of contact the broker has with the clients, specialised training, who generates leads, the time it takes to convince the clients to refinance, the claw back period etc. 

It is reasonable to restrain a broker from taking confidential client information at all.  

It was also considered reasonable in this case for the broker to be restrained from soliciting or even accepting an approach from the clients for eighteen months following termination, as a result of the level of contact the broker had with the clients.

Damages

The broker was ultimately permanently restrained from using the client information, restrained for eighteen months post termination from contacting, soliciting, canvassing or accepting an approach from any clients.

He was also ordered to pay the brokerage company the upfront commission, and expected future trail commissions for loans written by the clients (other than the client who was wanted to leave anyway).

Impact on churn and clawback

The risk of clawback after a broker leaves is very real. If they are not prevented from taking your client list, or dealing with the clients, after departure then the impact to your business is not only loss of that particular client, but any clawback charged as a consequence and the risk that lenders will identify churn.

What does this mean for you?

If you are a mortgage broker you must carefully read your agreement to make sure that you comply with it on departure.

If you are a sub-aggregator or brokerage company which hires or sub-contracts brokers and want to protect your clients, you need to make sure your agreement properly defines clients and clearly prevents brokers from taking confidential information or dealing with clients post termination.

To make sure any churn, clawback and damages is minimised, once you realise that a broker is improperly dealing with your clients, you should immediately seek legal assistance.