With the final guidance on the best interests duty now here, MoneyQuest compliance manager Tim Donahoo assuages some of the fears around the new obligation.
Unsurprisingly, ASIC’s recent release of Regulatory Guide 273 on best interests duty (BID) has reignited industry discussion on what BID means, how it applies and the fact that it applies solely to brokers and not lenders.
Debate and analysis are healthy, as it’s important that a clear understanding of what is required is held by everyone subject to the laws from 1 January 2021. However, it is also important that such discussions are based on fact and that misconceptions are addressed.
Two arguments frequently appear in commentary, and both are based on a perceived misinterpretation of the essence of BID and how it will be administered.
First, ASIC’s role needs to be appreciated. ASIC does not make laws – that is the responsibility of Parliament. ASIC has the task of administering the application of the relevant laws and monitoring the compliance of those to whom the law applies. Whatever we might think of any law, and whatever it requires of us, there’s no point in blaming ASIC for any perceived shortcomings or problems. ASIC has to work with what it is given. As such, if there’s a belief that any law is flawed, we should direct those concerns to our elected representatives.
The other sentiment widely expressed is that BID is inequitable because it only applies to brokers and not to lenders and their staff. On the surface, this view appears to hold some merit, but a closer examination of the reasoning behind BID will provide a different perspective.
Let me explain: a lender is limited in the product options it can offer to a prospective borrower in that it can only suggest the products in its range. Someone seeking finance directly from that lender is aware of this – a customer would not expect a CBA lending manager to offer an ANZ Bank product to them, for example. The reality, for a lender, is that it is restricted in its possible solutions for a borrower.
Conversely, a broker typically has access to a wide range of product options, across numerous lenders, depending on the size of the broker’s lender panel and number of lender accreditations. In any given scenario, there may be literally hundreds of potential outcomes that the broker can present to a customer. This range of choice and flexibility is a prime reason people elect to use a broker; brokers provide the opportunity to consider multiple options that may be superior to what one lender’s narrow range of products can offer.
So, given that brokers potentially have a large range of possible outcomes, is it not appropriate that they should be expected to provide the most beneficial result to customers?
Most reputable and professional brokers typically adopt this approach anyway; the effect of the BID legislation is that all brokers will be required to do so. Given the financial implications of entering into a long-term loan, should there not be a clear responsibility on brokers to make sure that what they have suggested to the customer is the best result for the customer from the (often) many options available to the broker?
The requirements of BID are not especially onerous and provide further protection for the broking sector in terms of the role it performs.
BID does apply a higher standard to brokers than that applying to lenders, but this further ensures that a borrower’s experience obtaining a loan through a broker will invariably be superior than dealing directly with a lender.
If anything, this is an outcome that should be celebrated and publicised.
Tim Donahoo is the Compliance Manager for MoneyQuest.
Before joining MoneyQuest in May 2020, Mr Donahoo worked at boutique aggregator Purple Circle Financial Services and had previously held several roles over a 20-year career at broking franchise group Mortgage Choice. He is a former MFAA elected Board member.
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