Incentivising referrals – how to maintain your compliance

June 29th, 2017

Offering your clients incentives for providing referrals

Customer referrals are good for business. Referrals from happy customers make great leads. That’s because most potential customers value the opinion of someone they know. It’s great when you can get your customers to do the heavy lifting for you by referring family and friends, and it usually gets much better results.

But have you ever asked customers to refer family and friends and offered some kind of incentive for doing so? Perhaps you have offered them a discount for other services you offer, or movie tickets, a bottle of wine, or a rebate on your commission? Maybe you offered a cash incentive? If so, you need to be aware of s49 of the Australian Consumer Law which prohibits ‘referral selling’.

The danger of referral selling.

Section 49 of the Australian Consumer Law (which is a schedule to the Competition and Consumer Act) states:

A person must not, in trade or commerce, induce a consumer to acquire goods or services [from them] by representing that the consumer will, after the contract for the acquisition of the goods or services is made, receive a rebate, commission or other benefit in return for:

(a) giving the person the names of prospective customers; or

(b) otherwise assisting the person to supply goods or services to other consumers;

(c) if receipt of the rebate, commission or other benefit is contingent on an event occurring after that contract is made.

Put more simply: If they are not yet your client, you cannot offer them incentives for referrals! The penalties for a breach of Section 49 are hefty – $1.1m for a body corporate and $220,000 for an individual – so getting this right is vital.

How does this apply to a mortgage broking business?

If someone is not yet your client, you cannot offer them incentives for referrals, in case this influences them to become your client. Take, for example, you are a mortgage broker providing credit assistance to a prospective borrower. As part of your sales pitch, you cannot tell them that if they refer family and friends they will receive a reward.

In this instance, the borrower is being enticed to obtain your services due to promises made that may or may not eventuate (ie. the family and friends may not obtain your services). This conduct is illegal because neither the borrower nor the broker can control the outcome. How to do it right?

It would not be considered ‘referral selling’ if you offer an incentive to the borrower regardless of whether the family or friends take up your services (that is, the borrower will benefit just from providing the names of family and friends with no conditions attached).

For example, your prospective client is Betty. You tell Betty you will give her $50 for a referral. Betty gives you 3 names and you give her $150, regardless of whether those names go onto settle a loan with you.

Similarly, you can offer a reward for signing up family and friends after the borrower has already obtained your services. That means, it’s acceptable to make the offer of an incentive for future referrals, after a home loan transaction has been completed with your customer.

For example, you may be able to contact the customer later and say, “If you are happy with the services I have just provided to you, please tell your family and friends, and if they take up my services, you will be rewarded.”

In this case the customer has already obtained the services of the broker and so the reward is not acting as an inducement for them to use that broker – it is merely a value-add.

Talk to your CSM!

As the penalties for a breach of Section 49 are severe, we recommend obtaining expert advice before offering any type of incentive to customers for providing referrals. You can do this by talking with your local Compliance Support Manager. Just send us an email outlining the plans of your referral or incentive campaign.

You can contact us by clicking the Help icon in Mercury and then selecting Compliance from the menu, or you can get in touch with us simply by emailing our Compliance Helpdesk directly at compliance@connective.com.au. We’re here to help!

Source: http://www.mpamagazine.com.au/sections/business-strategy/the-dangers-of-referral-selling-222807.aspx