The federal government has released final regulations that define conflicted remuneration and when it cannot be accepted by mortgage brokers.
The “Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers) (Mortgage Brokers) Regulations 2020” build on the draft regulations released in August 2019 for public consultation.
While the final regulations include updates following both public and “targeted” consultation, they do not include material changes to the clawback provisions.
However, they do include several changes and amendments around net of offsets, including modifying how the maximum commission payable to the broker on the amount drawn down by the borrower is calculated, as well as excluding line of credit facilities, reverse mortgages and credit facilities which are predominantly for construction or renovation purposes from this calculation.
Changes were also made to clarify that benefits legitimately attributable to economies of scale are not volume-based benefits.
As expected, campaign and volume-based benefits have officially been banned, with the regulations providing further definitions of what constitutes these type of benefits.
The regulations prescribe circumstances under which a benefit is, and is not, conflicted remuneration.
According to the regulations, “a monetary benefit given to a licensee, or a representative of a licensee, is not conflicted remuneration if the benefit is given by a consumer in relation to a credit service provided to the consumer by the licensee or representative”.
Moreover, it states that a monetary benefit given (whether directly or indirectly) to a licensee, or a representative of a licensee, is not conflicted remuneration if:
The regulations also outline that certain non-monetary benefits are also not deemed to be conflicted remuneration.
- monetary benefits that meet a number of specific requirements directed at ensuring the benefits are transparent and do not negatively impact consumers;
- infrequent, low-value non-monetary benefits (less than $300);
- non-monetary benefits related to education and training (that takes up either 75 per cent of the time spent on the course of six hours a day and that is paid for by the participant, the participant’s employer or licensee, or the mortgage intermediary); and
- non-monetary benefits related to IT support provided in relation to credit contracts.
The regulation also clarifies the net of offset agreement (that commissions will be paid based on the amount drawn down, net of offset – rather than the total loan amount).
While the original regulations only allowed 90 days for the offset to be drawn following the contract date and the maximum drawdown cap amount to be established, this has been extended to 365 days (as previously announced), following consultation with industry.
Moreover, the drawdown cap only applies to benefits given within one year of the beginning of the credit contract (regardless of whether they are upfront or trail commissions).
The drawdown cap does not apply to benefits given after this period.
The cap applies to a monetary benefit (i.e. commissions) for a credit contract secured by a mortgage over residential property that is given within one year beginning on either:
- the first day on which an amount of credit is provided to the consumer under the credit contract if it is not to wholly or partly to refinance credit; or
- the first day on which an amount of credit is provided to the consumer under the credit contract after the refinanced credit (whether wholly or partly refinance credit) is made available.
Top-ups would also be subject to the drawdown cap if it constitutes a benefit to which the cap applies.
The drawdown cap does not apply to:
- reverse mortgages;
- line of credit facilities;
- loans for a home renovation or improvement facility;
- loans that wholly or partly refinance the original loan provided for a home renovation or improvement facility.
How to work out maximum drawdown net of offset
The regulations also outline how to calculate the maximum drawdown net of offset.
For each day during the year, the cap is worked out by calculating the difference between:
(a) the amount of debt actually provided to the consumer under the credit contract, as the amount stands on that day, including any interest, fees and charges; and
(b) the total of all amounts standing to the credit of the consumer in all offset accounts held by the consumer on that day in relation to the credit contract.
When the regulations apply from
Notably, the explanatory statement outlines that the regulations apply in relation to conflicted remuneration given on or after 1 July 2020 if the benefit is given under an arrangement entered into after that date.
However, in May, ASIC deferred the best interests duty obligations and ban on conflicted remuneration until 1 January 2021.
It has not yet been clarified by government whether benefits paid on or after 1 January 2021 for contracts entered into after 1 July 2020 (when the regulations apply) and before 31 Dec 2020 will be covered by the new rules.
MFAA response to members
Following the release of the regulations, Mike Felton, CEO of the Mortgage & Finance Association of Australia (MFAA), told members: “After a productive period of consultation, advocacy and negotiation, the MFAA welcomes the release of the final regulations from Treasury that will govern mortgage broker remuneration into the future…
“In essence, these new regulations clarify which benefits received by mortgage brokers are to be considered conflicted remuneration, and provide guidance on when conflicted remuneration must not be accepted or given. They also address a series of other complex issues related to remuneration.
“The finalisation of the Regulations and Explanatory Statement follows a lengthy period of consultation during which both the MFAA and the Combined Industry Forum made every possible use of the multiple opportunities given to provide input into the regulations.
“The government’s commitment to consultation – and ongoing engagement – has once again demonstrated their recognition of the importance of the mortgage broking industry, and their commitment to develop legislation, associated regulations and supporting documents that are appropriate for the industry.”
Mr Felton continued: “When the initial drafts of the regulations and explanatory statement were first released last year, we noted a number of key issues which we brought to the attention of Treasury and government. After working through these issues over the past year, we are pleased with the overall outcome on these matters.”
The MFAA CEO concluded: “This is a significant milestone for our industry, and one that reflects both the maturity and professionalism of mortgage broking, but also the importance of our industry to our economy.
“I believe we can now look with confidence and certainty towards 2022 and beyond, as our industry continues to drive increased market share, based on ever-growing consumer confidence.”
[Related: Final clawback regulations released]