Industry has its say on who a broker acts for

In the closing statements for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Hayne asked: “It’s a deceptively simple set of questions to ask: who does a mortgage broker act for?

“You can put it in three ways, I think, and the issue has at least three elements to it. Who does the broker act for? That might be seen as an inquiry about fact or fact and law. Two, who does the customer think the broker is acting for? And third, who does the lender think the broker is acting for?

“So, who does a broker act for, who does the customer think the broker acts for, who does the lender think the broker acts for, are there varying or varied answers at various steps? If there are, what are they?”

“They do not act for their lenders any more than a shopkeeper acts for manufacturers”

In response to the call, mortgage brokering franchise Smartline suggested that the answer was not clear-cut.

Primarily, the brokerage said that its brokers’ “primary role” is to provide credit assistance to their customers.

In this sense, Smartline said, brokers act “for” their customers.

However, it went out to state that brokers have another, complementary, role — one that is no less important.

The brokerage added that brokers “must take reasonable steps to verify the financial situation of their customer”, before suggesting a loan or assisting their customer to apply for it.

“They must also refrain from suggesting a loan or assisting the customer to apply for a loan they have assessed as unsuitable. Thus, a broker might be thought of as acting ‘for’ the customer’s interests, in the sense that this part of their role is protective of their customer.”

However, the group argued that a broker’s role involves statutory requirements that “must be discharged independently of what the customer desires them to do”.

It continued to highlight that brokers also undertake certain steps on behalf of the customer, including filling out the customer’s loan application based on the information provided by the customer, and submitting it to the lender.

“However, the broker’s role as representative of the customer is limited,” the brokerage said.

“For example, the details included in the loan application form are the details provided by the customer. While the broker takes reasonable steps to verify the customer’s financial situation, the broker does not warrant the truth of the details per se: they do not have any sensible basis on which to do so.

“Similarly, the broker does not have the power to commit the customer to a loan: the loan contract is ultimately signed by the customer on the customer’s own behalf.”

It concluded: “Brokers owe duties to their panel lenders under contract, but they do not act for their lenders any more than a shopkeeper acts for the manufacturers of products she stocks.”

Earlier this week, 1300HomeLoan founder and managing director John Kolenda said that while brokers provide lenders with competition (and provide greater access to smaller and regional lenders), “the foundation of the broking industry is the customer comes first”.

He added: “Even the major banks have acknowledged that brokers are instructed by and act on behalf of the customers.”

Meanwhile, South Australian broker Evan Sourbis recently told The Adviser that there was a disconnect between what brokers are thought to do, and what brokers actually do, which needed to be remedied.

Speaking on the Elite Broker podcast, the principal of Henley Home Loans said: “What brokers are perceived to do and what brokers actually do is something that probably should be put out there a little more.

“Brokers obviously do a lot more than find someone a cheap interest rate or find someone a home loan. Brokers, firstly and foremost… understand the client’s needs. So, a client, when they come to you, they may not understand that themselves. And it’s actually very common that they [also] don’t understand themselves what they need. That’s where a broker really comes into it.

“A broker will basically cut down to it and say: ‘Well, this is where you are right now. You should really be here and let’s have a look at how we can now put that into place’.

“So, it’s not just the interest rate; it’s — in some cases — restructuring the customer’s home loans.”

Mr Sourbis gave the example of a customer coming to him with multiple credit cards, “which he didn’t think was a big issue”, and how he explained to him that his lending profile could change if he was to consolidate his debt. He also outlined how he found a home loan for a customer that had been “knocked back [by] a bank”.

He said: “Without a broker, the customers that are knocked back by a bank have nowhere else to go and the brokers… allow the customer to get into home ownership by looking at other lenders, and he’s able to get through it with the knowledge and the tools that they have.

“So, for me, that’s what a broker does and it’s really not just about the interest rate (although when the customer does go to a broker, a lot more likely to get a lower interest rate, then they would be going directly to their bank).”

[Related: ‘Every single mortgage holder’ would suffer without brokers: AFG]