Best interests duty needs ‘careful consideration’: Treasury

While the paper does not make recommendations, it “seeks to set out the issues involved, the current regulatory framework and how it developed, and the trade-offs involved in various responses to these matters that the commission could consider”.

Specifically, Treasury touched on three areas that “go to the heart of the instances of misconduct and failures to meet community standards brought to light during the hearings to date”:

• the culture and governance of financial (and other) firms and the related regulatory framework;
• the capability and effectiveness of the financial system regulators to identify and address misconduct; and
• conflicts of interest arising from conflicted remuneration and integrated business models.

In regards to conflicts in mortgage broking, Treasury noted that the Productivity Commission’s draft report into competition in the Australian financial system proposed a best interests duty for lender-owned aggregators and brokers working under them, with consumer advocacy groups also endorsing a general best interests duty for all brokers “as a means of aligning the incentives of brokers to customers rather than lenders”.

Noting that brokers in other countries have a best interests duty (such as the United Kingdom and New Zealand), the Treasury report stated: “As brokers act as trusted advisers for customers with respect to housing finance, there is an in-principle case for introducing a positive duty on brokers to act in the interests of their customers. While responsible lending obligations provide protection against customers being recommended loans that are too large or otherwise not suitable for them, the purpose of a positive duty would be to counteract incentives to, for example, recommend a particular lender and loan type because the commission available to the broker is higher or because the loan is an in-house or white label product.”

The government department went on to suggest, however, that applying a positive duty to brokers would not “necessarily be best achieved by attempting to replicate the financial advice best interests duty, given differences between brokers and financial advisers, and the existence of responsible lending and other obligations”.

It therefore advised that if one were to be introduced, “careful consideration would again need to be given to an approach that mitigates conflicts of interest risks while avoiding unnecessary compliance costs, and to what extent it can rely on industry efforts or providing ASIC with some discretion or rule-making power”.

Treasury concluded: “For mortgage broking, the regulatory framework is less interventionist, with no direct regulatory restrictions on conflicted remuneration or positive duty on brokers to act in consumers’ interests. In part, this reflects the fact that the broker’s role is a narrower and well-defined one, and that mortgage broking represents a distribution channel for a specific financial product.

“As a key distribution channel for mortgages, and by assisting consumers’ search for a better deal, mortgage broking also has a vital role in facilitating effective competition and better outcomes for consumers that needs to be taken into account in assessing reform options.

“Following a comprehensive report by ASIC in 2017 on mortgage broker remuneration, the industry is progressing reforms that could address the most significant misconduct with the current remuneration model, and ASIC is to obtain powers to intervene when satisfied that there has been, or is likely to be, significant consumer detriment.

“The adoption of a positive duty on brokers to act in consumers’ interests may also merit consideration if it can be achieved without adding undue compliance costs.”

Best interests or good consumer outcomes?

The debate around raising the obligations for brokers has been widely debated in the past year, with the Consumer Action Law Centre telling the royal commission earlier this year that responsible lending standards were “inadequate”, particularly calling out the National Consumer Credit Protection Act’s requirement that credit licensees ensure that products or contracts are “not unsuitable for the consumer”.

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

It’s a topic that has been triggered by the fact that ASIC’s review of broker remuneration looked at whether brokers are providing “good consumer outcomes”. While there is no current legislative definition for what this could look like for brokers, the Combined Industry Forum last year 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.”

[Related: Treasury releases its thoughts on broker remuneration]