How brokers can meet the best interests test

The draft bill has now been tabled in Parliament and the Government has stated that it wants the bill ratified in time to come into effect on 1 July 2020.  

The Treasurer stated the best interests duty will bring the law into line with what consumers expect of mortgage brokers.  

After the conference I was asked whether the Federal Government’s proposal for a best interests duty was top of mind for the sector.  

The reality is new obligations under the proposed best interests duty haven’t come as a surprise to most mortgage brokers. In fact, mortgage brokers have been operating for years with what is, in effect, a self-regulated best interests duty.  

A mortgage broker’s business is entirely dependent upon their relationships with customers. Without good customer service a customer will not return to their broker and they will not refer friends or family. Their role is to help borrowers source and apply for home loans and to refinance existing mortgages, including providing assistance to help customers make informed credit decisions.  

In the main, brokers are small businesses focused on looking after their customers in the hope that word of mouth will open up new opportunities. Good customer service is embedded in a broker’s DNA. It’s central to their business model. A broker’s business is built on fostering long-term relationships. It is an industry built on referrals, which require good service and satisfied customers.  

A Deloitte report into the mortgage broking industry shows nearly three-quarters of a broker’s business is generated from referrals. And they must be doing something right. Mortgage brokers now account for around six out of every 10 home loans lodged in Australia.  

Without an absolute commitment to the customer, it would be impossible for mortgage brokers to carve out such a significant slice of market share. Australian consumers are savvy. If they don’t like something, they won’t use it.  

New data released by the Australian Financial Complaint Authority (AFCA) shows of the tens of thousands of complaints made by consumers against the financial services industry – about 0.1 per cent were filed against mortgage brokers. That’s about one in every thousand complaints registered with AFCA. It would be little surprise to note that AFCA reveal most of the complaints from consumers were about the banks.  

We commend the Treasurer for consulting with industry to understand what is happening in the market.  

The new laws don’t specifically prescribe what constitutes ‘best interest’. This is because across the financial services industry, every transaction and interaction is different in its own way. 

It makes it impossible for the legislation to stipulate in a way that covers every potential scenario.  

Instead, the proposed laws will simply state that mortgage brokers will need to show they are acting in the best interests of their customers. If the industry does not meet this challenge, there is every chance the government will step in.  

The Treasurer’s sensible decision to commission a three-year review examining the impact of any changes to competition in the sector has given the mortgage broking industry three years to demonstrate that we will comply. And we are grabbing the opportunity with both hands. 

We want to lead the market and demonstrate best practice so that by the time the review into the industry and remuneration is concluded, we will have shown that we do act in the best interests of our customers.  

ASIC challenged our industry to evidence the fact that we source the best information and present it objectively and transparently so that customers clearly understand the options before them. 

So, to demonstrate that we are meeting the best interests test, rather than just complying with the new law when it comes in next year, AFG and its national network of brokers are taking proactive and pre-emptive steps to demonstrate to customers that they have always been, and will remain, the number one priority.  

As such, we recently announced that we had lifted our disclosure obligation to customers with a concise one-page document attached to home loans sourced through AFG credit representatives. Attaching this document as the front page of the credit proposal ensures both the customer and the broker are clear about what is available and why it was selected.  

We are of the view that if it’s in the best interests of customers, then we should be doing it today. That’s how the mortgage broker business model works.