A former major bank executive believes that brokers could ultimately benefit from working under a “best interest” duty similar to the regulatory framework of the financial advice industry if it is introduced.
The Productivity Commission’s draft report into competition in the Australian financial system suggested that the mortgage broking industry could be improved by having a best interest duty, which is currently in place for financial advisers.
“Nothing obliges brokers to act in a client’s best interests — under the National Consumer Credit Protection Act 2009 (Cth), brokers are only required not to suggest unsuitable loans to consumers, rather than act in their best interests (although they must also have arrangements in place to manage conflicts of interest),” the report notes.
The report highlights that there is a “strong case” for a duty of care to apply to all brokers, stressing that bank-owned aggregators should be a priority.
“The commission therefore considers that it is now necessary for a legal duty of care to act in consumers’ best interests to be imposed on lender-owned aggregators and the brokers working under them,” the report says.
It notes that financial advisers handling similar-sized sums to mortgage brokers now have a regulated obligation to act in clients’ best interests, and that this obligation arises notwithstanding ownership or employment arrangements.
“While there is a strong in-principle case for a similar duty of care to apply to all brokers, it should in the first instance be applied to lender-owned aggregators, since this is where the potential for conflicts of interest is greatest.”
Speaking at the Futurus Group annual conference in Sydney on Friday (9 February), former NAB executive Steve Weston explained that the industry is still trying to identify what “good consumer outcomes” look like.
“Right now, under the ‘not unsuitable’ rule with NCCP, you can sell a customer a higher rate as the broker needs to ensure ‘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 requirements and objectives at the time of seeking the loan’. If the customer’s requirements do not include the cheapest interest rate available, there is no reference to the price competitiveness of a loan.
“In a ‘best interests’ test, there would be a lot more focusing on showing why a higher rate product was recommended.
“Additionally, brokers are going to need to demonstrate that they are keeping in contact with their customers to support their trail commission. This will include ensuring the product the customer is in holds is appropriate for their needs. Right now most lender contracts with brokers will say that brokers can’t contact customers to encourage them to refinance. Under a ‘best interests’ test, a much greater focus will be applied to how competitive the customer’s rate is. And if it isn’t competitive, there will be justification to refinance the customer. So, customers get better outcomes out of brokers meeting a best interest obligation. This would likely lead to higher levels of refinance activity for brokers.”
The Productivity Commission’s report was heavily focused on mortgage pricing, concluding that brokers only have a slightly lower rate than those originated through other channels.
Mr Weston said that under a best interest duty, the first area of focus will be how competitive the rate a customer is paying.
“If the client has had their home loan for three years, the chances of them getting a better rate are pretty high,” Mr Weston explained.
“The refi market will grow just like it has in other markets that have a best interest test. Brokers will be following up with their clients and looking to put them into better rates. It won’t be a matter of churning to seek higher upfront commissions; it will be a regulatory obligation they need to comply with. Any refinance limitations in panel lender agreements will fall away as being contrary to a best interest test law.”
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