The major banks have agreed that an appropriately crafted best interests duty for brokers, different to that applied to financial advisers, could help preserve the integrity of the third-party channel.
In their responses to the Hayne royal commission’s interim report, ANZ Bank, Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac have agreed that the introduction of a best interests duty for mortgage brokers could improve customer outcomes.
Commonwealth Bank suggested in its submission that the best interests duty go beyond the current obligation to conduct an “unsuitability” assessment and take into consideration the products (including all their features) that mortgage brokers have available to them to ensure that “any duty appropriately defined is fit for its purpose”.
The major bank is opposed to such a duty being extended to lenders as they are limited to supplying their own products.
“Lenders are not customers’ agents nor regarded by customers as their agents, and it would not be appropriate to extend the same duties to them,” CBA stated in its submission.
According to Commonwealth Bank, a mortgage broker’s duties are:
- To act efficiently, honestly and fairly as stipulated in the National Consumer Credit Protection Act 2009.
- To undertake an “unsuitability assessment”, which involves making “reasonable inquiries about the consumer’s requirements and objectives in relation to the credit contract and make reasonable inquiries about, and take reasonable steps to verify, the consumer’s financial situation”, as well as ascertain whether the customer would be able to comply with the obligations stipulated in the credit contract without substantial hardship and whether the contract will meet customer’s requirements or objectives.
- To have “adequate arrangements” in place to ensure customers are not disadvantaged by any conflict of interest.
- To establish a contract with the customer where there is an “implied warranty that their services will be provided with due care and skill”, and in some circumstances, that their services are “fit for purpose”.
NAB noted in its own submission that a “customer first duty” for the mortgage broking industry has already been crafted by the Combined Industry Forum (CIF), which it believes “establishes a positive, objective, measurable test and, if appropriately applied, will result in an outcome that is in the interests of the customer”.
It additionally pointed out that the customer first duty incorporates a “good customer outcome” definition that would hold the mortgage broking industry to a higher obligation than the current “not unsuitable” obligation. The definition includes that the loan is of appropriate size and structure, meets the customer’s requirements and objectives, affordable for the customer, and applied for in compliance with responsive lending requirements.
In line with the CIF’s proposal, NAB suggested that the duty be tested and monitored, and for there to be a mechanism for enforcement. This is being addressed by the CIF through the establishment of a governance framework that includes the assignment of unique identifiers to brokers that can help track their activities, standardising annual reviews of the compliance governance frameworks of aggregators and broking firms, and identifying key indicators of risky behaviour within the data that is captured in the industry.
The key risk indicators that will be applied to the data include percentage of owner-occupied and interest-only loans, 90-day-plus arrears on loans originated within the last 12 months, switching lenders in the first 12 months, elevated level of customer complaints relative to industry, post-settlement surveys relative to industry, and deficiencies found in requirements and objectives documentation.
NAB, however, is opposed to the idea of imposing a similar duty on aggregators, noting that while aggregators have a role to play in ensuring that their brokers fulfil their duties, they do not have any direct relationship with the borrower and do not make any credit decisions in relation to individual borrowers.
While Westpac executives repeatedly expressed the bank’s preference for the proprietary channel in Productivity Commission and royal commission hearings throughout the year, the major bank’s response to the interim report acknowledged that it is “in customers’ interests that brokers remain a viable channel, as it has been recognised that a large number of Australians value brokers as a means of accessing finance”.
Westpac is explicitly against the introduction of a best interests duty for brokers similar to the one imposed on financial advisers, as it is “unnecessary and likely to be problematic in practice”, and believes that existing obligations and the revised Code of Banking Practice likely sufficiently outline the duties that intermediaries owe to customers.
But the major bank supports the “clarification of obligations for brokers” through the CIF’s customer first duty.
ANZ Bank stated in its submission that it believes that a best interests duty, like the customer first duty proposed by the CIF, should be fit for purpose for mortgage intermediaries, promote competition, provide transparency, and promote “simple” and “achievable” solutions.
But unlike NAB, ANZ supports the imposition of a “related duty” on aggregators.
“As with mortgage broker duties, ANZ considers that aggregator duties ought to be codified in a similar instrument,” the major bank stated in its royal commission response.
It further noted that aggregators are relied on by lenders to assist in the governance and oversight of mortgage brokers, and called for a consistent approach to such governance and oversight regardless of the broker’s credit licensing status.
ANZ admitted that lenders’ systems to detect and prevent breaches of responsible lending obligations by mortgage brokers could be improved by centralising and standardising responsible lending training for brokers, using personalised transaction data to verify customers’ living expenses, and by adding into aggregator agreements the requirement for them to monitor broker compliance and act on broker “red flags”.
“With respect to fraud by mortgage brokers, ANZ would support a requirement that aggregators report the disaccreditation of brokers for fraud or misconduct to lenders with whom the broker is accredited,” the major bank stated in its submission.