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CIF flags risks to commissions on top-up loans

by Charbel Kadib5 minute read
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Commissions paid to brokers on top-up loans may be deemed “conflicted remuneration” under the current drafting of the best interests duty bill, the industry working group has warned.

In its submission to Treasury, released following the publication of the draft best interests duty bill, the Combined Industry Forum (CIF) flagged risks with s28VB of the bill.  

The section was not updated in the bill tabled in Parliament last month.

The current bill states that monetary benefit would not be conflicted remuneration if the credit is “provided, or intended to be provided, wholly or predominantly for the purpose of:

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  • purchasing residential property; or
  • refinancing credit that has been provided wholly or predominantly for the purpose of purchasing residential property.”

In its submission, the CIF – which consists of leading stakeholders in the mortgage industry – warned that s28VB could prohibit the payment of commission for top-up facilities, which may include additional funds secured by the same residential property or construction loans.

“The payment of upfront commissions and trail on these further borrowings occurs frequently within the industry,” the CIF noted.

The CIF has thererfore urged Treasury to revise the legislation so that it permits the payment of commissions in certain conditions.  

“In circumstances where the security against a loan has not changed but the customer wishes to make further borrowings, the broker should receive remuneration for credit assistance on regulated loans secured by a residential mortgage relating to the altered loan amount,” the CIF submitted.

As a result, the CIF has recommended: “That s28VB be amended to allow remuneration to be payable for the provision of credit assistance under regulated credit contracts secured by a mortgage over residential property in relation to loan top-ups.”

The phrasing of s28VB of the bill is among several issues flagged by the industry in the government’s best interests duty bill, including the proposed definition of a mortgage broker and the provisions surrounding clawbacks.  

In a webcast hosted following the tabling of the bill in Parliament, Connective director Mark Haron assured brokers that industry groups will continue to consult with policymakers to address such concerns.

Mr Haron also noted the benefits of a “non-enforceable” period of 12 months that could be put in place after the proposed laws come into effect on 1 July 2020.

According to Mr Haron, this would ensure that stakeholders have enough time to prepare their businesses for the changes, particularly those relating to remuneration reform.

“There’s going to have to be systems changes to lenders around some of the remuneration [reform] – how they calculate net of offset and those continued payments,” Mr Haron observed.

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 has said would be “almost as crucial as what’s in the legislation”.

[Related: Industry united in push for clawback reform]

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Charbel Kadib

Charbel Kadib

AUTHOR

Charbel Kadib is the news editor on The Adviser and Mortgage Business.

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