Association working to ‘fix’ reference checking laws

Reference checking issues

One of the areas of work the member body had been working on, Mr Felton said, was around the incoming reference checking obligations.

Noting that the financial services regulator last month issued its protocol and guidance documents to help credit licensees comply with their new reference checking obligations from 1 October, Mr Felton suggested that there were still improvements that could be made to the regime.

While noting that the reference checking system would not only improve the hiring process, Mr Felton said it could have the added benefit of replacing the letters of separation from aggregators which “have not always been transparent consistent or procedurally fair”.

However, Mr Felton highlighted that the structure of the current regime does not necessarily recognise that some brokers hold their own credit licences (rather than coming under an aggregator’s licence, as a representative).

The MFAA CEO explained: “Essentially, the way it’s structured is as a comprehensive reference provided by a referee licensee to a recruiting licensee...

“The problem is it’s been structured at a licensee level where the licensee provides the reference. Now many brokers, in fact, have their own licence, which would mean that the aggregator is not in the picture... We believe that it’s a shortcoming in the protocol that the aggregator, in some instances, does not have visibility of that reference and, indeed, are not required to provide one. 

“And, if you’ve got a situation like that, you can then have people responsible for misconduct moving in the industry, which can affect the reputation of your industry,” he said.

The same issue arises in the breach reporting requirements, which requires licensees to report a significant breach or a reportable situation of a core obligation to ASIC (regardless of whether they hold their own licence).

As such, he added: “We’ve been working with Treasury to have the legislation fixed, but there are scheduling issues; there’s a lot on the legislative agenda, so it might not happen before the first of October.”

Mr Felton said that while the obligations will still commence on 1 October, the association would update members should the licensee requirements change.

Excluding brokers from DDOs

Other regulatory work that the association had been undertaking included the incoming design distribution obligations (DDOs).

Under the DDOs, lenders and brokers will need to take a consumer-centric approach to how they design and distribute mortgages from 5 October, as outlined in ASIC’s December 2020 regulatory guide.

Mr Felton said: “In essence, the issuer creates a target market determination and then the distributor is required to distribute in accordance with that target market determination. Now, both brokers and aggregators are suited to be distributors under design and distribution obligations...

“We are of the belief that with [mortgage brokers] having a best interests duty [BID], which is in fact a far higher duty than anything specified under design distribution obligations, it would be appropriate that [they] should not have to meet the target market determination, or to be worried about that.”

He added that while personal advice is an excluded conduct clause in regards to the distribution of financial products, this concept only exists in corporations law, not in credit law, and therefore excludes financial advisers, rather than brokers.

“Treasury has acknowledged that the intent is for brokers to be excluded conduct because of their personal advice, and they’re working on clarifying that. 

“We’re hoping to get something soon that clarifies, indeed, that credit assistance provided by a mortgage broker under BID is classified as personal advice,” he said, adding that aggregators may also be excluded from the DDOs under the ‘excluded dealing’ carve-out, due to the fact they are not consumer-facing and their brokers distributing the loan would be exempt as they are offering personal advice (should the law be amended to reflect that).

Giving brokers CDR access

The final regulatory issue that the MFAA had been working on, the CEO said, focuses on the consultation to enable brokers to receive Consumer Data Right data as a trusted adviser.

Currently, the rules do not permit the disclosure of CDR data by an accredited data recipient (ADR), such as a bank, to other parties that the consumer may wish to share their CDR data with. However, a consultation to amend that closed last week.

Mr Felton said: “Treasury [have] made their intent clear to change the rules to accommodate consumers’ trusted advisers, particularly a mortgage broker, and indeed on the 1 July, they published the latest draft set of rules, which goes some way to implementing that.

“At the moment, a consumer can be invited by an accredited person to share their data with a trusted adviser, but we really wanted it to be that the consumer can instruct their data holder, an incumbent lender, to share their data with the broker because that would be the most logical way to give consumer control, and to ensure that the broker is not... reliant on others.”

“We don’t think it’s perfect yet, but certainly we look forward to working with Treasury to get it right,” he said.

[Related: ASIC releases reference checking protocol for mortgage brokers]