Calls to revise ‘not unsuitable’ standard

Writing in its submission to the Royal Commission into misconduct in the banking, superannuation and financial services industry (hearings for which begin next week), CALC said: “The standard for responsible lending, particularly for mortgage brokers, is inadequate and is a driver of conduct that does not meet community expectations.

“Under the NCCP Act, lenders and brokers must complete an assessment as to whether a loan is ‘not unsuitable’ for a consumer, having regard to their requirements and objectives, and ability to meet repayments without suffering financial hardship. In undertaking this assessment, they must make reasonable inquiries about the consumer’s requirements and objectives and financial situation, and take reasonable steps to verify the consumer’s financial situation.”

The group suggested that it is “not uncommon” for assessments of suitability to be “completed using automated processes that arguably do not meet these obligations”.

CALC continued: “The ‘not unsuitable’ standard is also arguably not in line with community expectations about how they will be treated by their lender or finance broker. Particularly in the mortgage broking market, consumers often expect that brokers are acting as trusted advisers and helping them to get the best deal… However, the reality is that mortgage brokers are not required by law to act in a borrower’s best interests. This mismatch in expectations is problematic and poses a risk of consumer harm.”

The law centre added that mortgage brokers should therefore be held to “higher standards”.

It’s a topic that has been the centre of discussion for the past few years, and one that is increasingly being brought to the fore with ASIC’s continued focus on whether brokers are providing “good consumer outcomes” (despite there being no current legislative definition for what this could look like for brokers) rather than products and advice that are “not suitable”.

CIF looks to raise the standard

In fact, when asked by The Adviser whether they believed the legal standard for brokers should be raised, both heads of the two main broker associations agreed, pointing to the Combined Industry Forum’s (CIF) work on defining “good consumer outcome”.

In its response to ASIC’s review of broker remuneration, the CIF set a standard definition for “good customer outcomes”, which looks at the size and structure of the loan, affordability, responsible lending requirements and individual customer needs.

The definition reads: “The customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”

Speaking to The Adviser, the executive director of the Finance Brokers Association of Australia, Peter White, said: “I think everybody is in agreement, and we looked at it in the remuneration review, that the standards need to be potentially raised.”

Mr White recalled that when the NCCP was first being discussed as the consultation committees with Treasury in 2008, there were “huge debates” over what the standard requirement should be.

He said: “You just can’t say it has to be ‘suitable’ because the argument comes down to: How suitable does it have to be? — i.e. does it have to be ‘very suitable’, or ‘completely suitable’, or ‘the most suitable’?

“Because what happens if it’s ‘most suitable’ is that it may differ from one broker to another. It can only be what is ‘most suitable’ in the suite of products that the broker has access to. So, there might be a more suitable product outside of their panel, but they might not know that or might not have access to it.”

Mr White added: “This therefore needs to be very carefully thought through.

“In my mind, this is something that will come up for further discussion and more detailed rigour. As much as the CIF may or may not discuss this further, this is a regulatory discussion, so it’s a discussion that needs to be had with ASIC and potentially… Treasury, too.

“But I’m certainly not opposed to a change, so long as it doesn’t create legal loopholes for people to prosecute [the industry] inappropriately.”

Likewise, the CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, said: “I think the standard should go to ‘appropriate’, as per the Combined Industry Forum’s recommendation and the definition of a good consumer outcome.

“I think we can do better than ‘not unsuitable’ [and] the CIF recognises that we can do better than something that is ‘not unsuitable’.”

Mr Felton continued: “In fact, for the first time, we are now going to do something that exceeds what is legally required in the form of having something that is ‘appropriate’. And that aligns to the MFAA code of practice.” 

The government has yet to release its response to ASIC’s remuneration review.

[Related: CIF response defines ‘good consumer outcomes’]