The updated best interests duty bill for mortgage brokers has been tabled in Parliament, outlining the role brokers need to take when helping a borrower from 1 July 2020.
The amended best interests duty – falling under the Financial Sector Reform (Hayne Royal Commission Response–Protecting Consumers (2019 Measures)) Bill 2019 – has been tabled in Parliament.
In August, the Morrison government introduced the first draft of the duty in the National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019 – as recommended by commissioner Kenneth Hayne in the final report of the banking royal commission.
The second version has now been tabled in Parliament. The key features of the new law are:
- mortgage brokers must act in the best interests of consumers in relation to credit assistance in relation to credit contracts (including credit assistance for credit cards and personal loans, such as those that are packaged with the mortgage as well as unsecured credit for home renovation);
- where there is a conflict of interest, mortgage brokers must give priority to consumers in providing credit assistance in relation to credit contracts;
- mortgage brokers and mortgage intermediaries must not accept conflicted remuneration [that which “could reasonably be expected to influence the credit assistance provided” or “could be reasonably expected to influence whether or how the licensee or representative acts as an intermediary”];
- employers, credit providers and mortgage intermediaries must not give conflicted remuneration to mortgage brokers or mortgage intermediaries; and
- the circumstances in which these bans on conflicted remuneration apply are to be set out in the regulations.
Notably, the duty to act in the best interests of the consumer in relation to credit assistance is a principles-based standard of conduct that applies across a range of activities that licensees and representatives engage in.
As such, what conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a consumer in relation to a credit contract.
The duty does not prescribe conduct that will be taken to satisfy the duty in specific circumstances. Instead, it is the responsibility of mortgage brokers to ensure that their conduct meets the standard of “acting in the best interests of consumers” in the relevant circumstances.
However, the new duty will mean that there could be circumstances where the mortgage broker may not have acted in a consumer’s best interests even if the responsible lending obligations were complied with. For example, even if a home loan product is “not unsuitable”, recommending it to the consumer might not be in the consumer’s “best interests”, the accompanying documentation reads.
The penalty for breaking this duty for both credit representatives and licensees is 5,000 penalty units.
Should the new bill be amended by the House of Representatives, it will go through a third reading and be considered by the second house.
This final text would then pass if agreed by both the House of Representatives and the Senate and given assent by the Governor-General.
Examples of the duty in action – white label called in question
In the explanatory materials, there are examples of steps that may need to be taken for this new duty. These include:
- prior to recommending any home loan product or other credit contract to a consumer based on consideration of that consumer’s particular circumstances, the mortgage broker may need to consider a range of products (including the features of those products), form a view about which products are in the consumer’s best interests and then inform the consumer of the range and the options it contains;
- any recommendations made would be expected to be based on consumer benefits rather than benefits that may be realised by the broker; that is, a broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer (such as the broker’s relationship with the lender), over factors and features which affect the cost of the product or are more relevant to the consumer;
- in cases where critical information is not obtained when inquiring about a consumer’s circumstances, the broker could be expected to refrain from making a recommendation about a loan where there is a consequent risk that the loan will not be in the consumer’s best interests.
Interestingly, the new duty also outlines that “a broker would not suggest, from their aggregator’s panel of lenders, a white label home loan that has the same features as a branded product from the same lender, but with a higher interest rate, because it would not be in the best interests of the consumer to pay more for an otherwise similar product”.
The explanatory materials go on to outline that during a periodic review, a broker also “would not suggest that the consumer remain in a credit contract without considering whether this would be in the consumer’s best interests”.
“For example, it may be a breach of the duty if the broker suggested the consumer remain in their current home loan when they could refinance to a cheaper product as the broker did not want to incur the consequent liability to the lender when their commission payments were clawed back,” it reads.
Helping consumers understand their decision implications
The materials also outline that there may be situations where the consumer does not properly understand the implications of different choices and so the broker may have to assist them to understand why a particular loan is or is not in their best interests, which could inform the brokers’ actions.
An example given is if a consumer asks the broker if they should take out an interest-only home loan on a property they are looking to buy, which has a higher interest rate than a principal and interest home loan. “The broker helps the consumer to understand the difference in cost of the two home loans, and other differences in the way in which they operate, including that the consumer will only build equity if the property’s value increases or they make additional repayments, and the implications of moving to higher repayments at the end of the interest-only period,” it outlines.
Another example is if a consumer asks the broker if they should take out a home loan with an offset account as they have heard this can save them money, even though the interest rate is slightly higher. “The broker helps the consumer to understand what is in their best interests, based on the difference between the higher interest rate and the savings that consumer could reasonably expect through utilisation of the offset account,” it reads.
Brokers expected to take ‘active steps’ to identify all conflicts
Another example area of the duty in action outlines that the obligation to give priority to the consumer’s interests is not limited to conflicts of interest that mortgage brokers currently know about.
Under the new duty, mortgage brokers will be expected to “take active steps to identify all conflicts of interest... to minimise the risk of a contravention, including obligations that can arise because of their commercial relationships with third parties”.
For example, if a mortgage broker has referral arrangements with a real estate agent “such that they are an associate”, then the broker would need to consider the conflicts that could arise, and ensure that they give priority to the interests of the consumer over their own interests or those of the real estate agent.
Comments from Frydenberg
At the second reading when the bill was tabled on 28 November, Treasurer Josh Frydenberg said: “[T]he bill introduces a best interests duty for mortgage brokers that will ensure that consumers’ interests are prioritised when a mortgage broker provides credit assistance, as regulated by the National Consumer Credit Protection Act 2009. In practice this will mean that, in accordance with commissioner Hayne’s recommendations, a duty will apply in relation to the provision of consumer credit assistance and not business lending.
“The government is also reforming mortgage broker remuneration, and the bill provides for a regulation making power to this end. The regulations will require the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount; ban campaign and volume-based commissions and payments; and cap soft-dollar benefits.
“Further, the period over which commissions can be clawed back from aggregators and mortgage brokers will be limited to two years, and passing on this cost to consumers will be prohibited.
“After careful consideration, the government decided to delay consideration of aspects of commissioner Hayne’s recommendations for mortgage brokers – namely, moving to a borrower-pays remuneration structure. We will be doing a review with the Council of Financial Regulators and the Australian Competition and Consumer Commission. That will be carried out in three years time.
“Implementation of these reforms, as recommended by the royal commission, is a critical component of restoring trust and confidence in Australia’s financial system and is part of the Morrison government’s plan for a stronger economy.”
The government will also introduce the Financial Sector Reform (Hayne Royal Commission Response–Stronger Regulators (2019 Measures) Bill 2019.
The bill implements a further four additional commitments the government announced at the time of responding to the royal commission and will ensure that ASIC can effectively enforce existing laws.
“The government is taking action on all 76 recommendations contained in the final report of the royal commission and, in a number of important areas, is going further. Restoring trust in Australia’s financial system is part of our plan for a stronger economy,” Mr Frydenberg said.
ASIC is expected to release further guidance around the best interests duty in due course.
More to come.