Best interests duty should apply to all products: AFCA

The Australian Financial Complaints Authority (AFCA) is among the industry stakeholders to submit a response to Treasury, in which it has called for a broadening of the bill’s application.

At present, the reforms apply to credit assistance provided by a mortgage broker (those that carry on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property).

However, AFCA has stated that reforms should be extended to all credit products recommended by brokers.

AFCA pointed to recommendation 7.3 of the banking royal commission’s final report, which stated: “As far as possible, exceptions and qualifications to generally applicable norms of conduct in legislation governing financial services entities should be eliminated.”

As a result, AFCA has suggested that consideration be given to extending the best interests duty:

• to all financial products and services recommended by mortgage brokers (including non-home loan arrangements such as leasing and other unsecured credit); and
• to all financial firms that engage in any form of broking or equivalent activity in relation to financial products or services.

This goes beyond the demands of broking industry stakeholders, who have flagged issues with the current wording of the bill.

Some stakeholders, including CEO of the Mortgage & Finance Association of Australia (MFAA) Mike Felton and Connective director Mark Haron, fear that the current wording of the bill would create an uneven playing field by not applying to brokers or credit representatives that do not “carry on” a mortgage broking business (i.e. finance brokers) even if they offer mortgage broking services.

To address this, they have proposed that the best interests duty regulate “the activity, not the person”.

However, in contrast to AFCA, both Mr Felton and Mr Haron have argued against the extension of the best interests duty to all credit products recommended by a broker.

According to the stakeholders, such a move could have the unintended consequence of seeing mortgage brokers cease offering personal loan or credit card services, due to the added time and administrative burden – and instead refer these out to external parties (who will not be covered by the best interests duty). 

“This is likely to incentivise brokers to stop providing credit assistance in relation to these products to avoid regulations they can’t reasonably meet, which is not a good outcome for consumers,” Mr Felton said.

“If these ancillary products are to be included in the duty, it is essential that the application of the new rules to these products is subsidiary to the primary objective, which is to obtain an appropriate home loan.”

Mr Haron added: “Consumer groups have been lobbying for the best interests duty to apply to all consumer-regulated lending a mortgage broker undertakes. Their argument is that, if a customer is going to a broker for a best interests duty on a home loan but not on the other products, that would be confusing for the customer.

“What the consumer groups have done is create a [situation where] they’ve left a whole bunch of people that are going to get home loans from a non-mortgage broker exposed, because they will not be covered by the best interests duty. 

“I don’t believe that some of these consumer groups are necessarily acting in the consumers’ interest at all. They’re just wanting to attack and target mortgage brokers, and they’re doing that and leaving the consumer – who they say they are trying to protect – exposed.”

More guidance around how the best interests duty applies in practice is expected to be released by ASIC before the end of the year, which Mr Haron said would be “almost as crucial as what’s in the legislation”.

[Related: Industry to continue engagement on best interests duty]