The royal commission has posed the question of who a broker acts for, who customers think brokers act for and who lenders think the broker acts for. Jon Denovan, special counsel at Dentons, considers the correct answers to these questions.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry asked:
Brokers’ obligations derive from a number of sources (see summary of key obligations below).
This discussion is limited to “pure” brokers and does not consider the position of hybrids such as mortgage managers and servicers who operate under the same licence conditions as brokers. These hybrids generally act on behalf of lenders, and usually this is apparent to borrowers.
The term “agent” is often used when discussing the role of service providers. “Agent” has no precise legal meaning, and a detailed analysis of whether brokers act as agent for anybody is futile because there are many types of agency, and the term “agent” has no precise legal definition.
This report uses the term “limited agent” to describe situations when the appointment (or legislation behind the appointment) uses the term “agent”.
The question is better addressed by reviewing the duties and obligations brokers owe to lenders and borrowers.
1. Obligations to borrowers
(a) There are extensive obligations on licensees under the NCCP Act. The key obligations are:
(i) act efficiently, honestly and fairly;
(ii) ensure that borrowers are not disadvantaged by any conflict of interest;
(iii) take reasonable steps to ensure that its representatives comply with the NCCP Act, but in any event licensees will be liable for the conduct of their representatives;
(iv) enter written quotes if borrowers are to be charged fees;
(v) provide written disclosure of commissions received (a Proposal Disclosure Document); and
(vi) responsible lending (making a preliminary assessment of whether proposed credit will be unsuitable).
(b) Many brokers enter service contracts with borrowers which specify a duty of care.
(c) Often brokers are appointed the limited agent of borrowers to obtain a credit report under the access-seeker regime.
(d) At common law, brokers would probably be categorised as the limited agent of borrowers to lodge applications and deal with lenders on their behalf.
2. Obligations to lenders
(a) Lender Agreements are usually between lenders and aggregators but provide that aggregators’ broker members must comply with the Lender Agreements. Dentons has over the years reviewed literally hundreds of Lender Agreements and so can speak with authority about the provisions in these documents. The terms vary, but there is a surprising degree of consistency across the industry.
(b) The Lender Agreements often appoint brokers the limited agent of lenders to conduct AML and VOI.
(c) Lender Agreements normally prohibit brokers from making representations or decisions on behalf of lenders. Many provide expressly that brokers are not the representative of the lender. Brokers’ role is usually limited to being entitled to submit applications while imposing an obligation on brokers to take reasonable steps to ensure that the information provided is accurate.
Who do brokers act for?
The factors summarised in the points above lead to the conclusion that brokers act principally for borrowers.
This accords with what we think are community, lender and borrower expectations.
Importantly, it also accords with what happens in the vast majority of cases — lenders might use information collected and verified by brokers, but lenders do not treat brokers as their representative.
Conversely, borrowers do treat brokers as their adviser and representative to help them get appropriate finance.
What could change?
The NCCP Act does not state that licensees authorised to provide credit services act for borrowers, and nor should it because there are many licensees with that authorisation that do provide services to lenders.
However, licensees acting as finance brokers could be required to make it clearer to borrowers who they represent by clear statement that they represent borrowers.
This disclosure is only implied in the current, legally required disclosures, but may be expressed in engagement or marketing material made by individual brokers.
This clarity of who brokers represent, when complemented by the other initiatives of the Combined Industry Forum, will continue the constant improvement of the finance broking industry.
In conclusion, based on the information set out above, we consider the correct answers to the questions posed above to be:
Who do brokers actually work for? Principally borrowers
Who does the customer think the broker acts for? Borrowers
Who does the lender think the broker acts for? Borrowers
Jon Denovan is special counsel at Dentons law firm and a leading authority on regulation and compliance for that industry.
His primary focus is on product development and process efficiencies for financial services businesses.
He was made the first honorary member of the Mortgage & Finance Association of Australia (MFAA), was recognised as a leading lawyer in financial services regulation in the 2014 edition of Chambers Asia Pacific and was voted by his peers as one of Australia’s Best Lawyers in Financial Institutions since 2013.
Jon writes numerous academic articles on the industry and was the principal author of the National Credit Regulation loose leaf service published by Thomson Reuters.
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