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Government to bring in new misconduct procedures for brokers

by Annie Kane7 minute read

New draft legislation has been released that aims to bring into effect new obligations for credit licensees around investigating and reporting breaches of the law, as well as notifying and remediating customers where misconduct occurs.

On Friday (31 January), the Morrison government released for consultation a raft of exposure draft legislation, which will implement 22 recommendations and two additional commitments arising from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Among the proposals set to impact mortgage brokers is a new obligation to check references and share information on Australian credit licensees (ACL), as well as new breach reporting requirements and further measures about notifying and remediating customers where misconduct occurs.

The latter reforms carry prison sentences if breached.


What the new obligations entail

In a bid to satisfy recommendation 1.6 of commissioner Kenneth Hayne’s final report (that ACL holders be bound to a similar regime for detecting misconduct as recommended for financial advisers), the new draft legislation seeks to amend the Credit Act so that licensees (for example, aggregators) need to report serious compliance concerns about any mortgage broker representatives to ASIC and the relevant licensee. 

ASIC must then publish data on these breaches (as it currently does for financial planners) and may include the name of the credit licensee, the volume of reported breaches, the breakdown of breach reports by corporate group, and the number of breaches compared with the size, activity or volume of business associated with an entity.

This may result in the names of credit licensees being published, should their ACL be registered in their name.

This reporting requirement relates to “significant” breaches or likely breaches of core obligations (i.e. those that could result in imprisonment, contravention of a civil penalty provision, or loss or damage to a credit activity client), or when the licensee or its representative has engaged in conduct constituting gross negligence or serious fraud. 

Notably, a credit licensee will also be required to report to ASIC that it has reasonable grounds to suspect that a reportable situation has arisen and if a licensee has commenced an investigation into whether it (or its representative) has breached a core obligation, even if this investigation does not find any reasonable grounds to believe that it resulted in a breach.

This must be done within 30 calendar days after the licensee has cause to believe that a reportable situation has risen. ASIC must also be informed of the outcome of any investigation within 10 calendar days of the conclusion of the investigation's findings.

A failure to lodge a report in line will therefore be an offence, with the maximum penalty fetching up to two years’ imprisonment, as well as civil penalties.

A copy of the report lodged to ASIC will also need to be provided to the licensee or broker in question within the same time frames, even if they are no longer operating under that licence.

“This reporting obligation therefore targets misconduct by and serious compliance concerns about individual mortgage brokers. It also recognises that in the industry, other parties such as lenders and aggregators are often well positioned to identify this misconduct,” the explanatory materials read.

Remediating misconduct

Under the proposed draft legislation, licensees will also be required to investigate potential and actual misconduct engaged in by financial advisers and mortgage brokers, and to inform and remediate affected clients.

When a licensee detects misconduct in relation to a credit contract secured by a mortgage over residential property, the ACL holder will be required to inform “potentially affected clients” of misconduct within 30 days of them knowing that the misconduct has potentially resulted in, or will result in, loss or damage (which the consumer has a legally enforceable right to recover).

They must also investigate the matter within 30 days.

Once an investigation is complete, the licensee must take “reasonable steps” to notify the affected customer of the outcome of the investigation in writing, no later than 10 days after completion.

This must include “sufficient information to give the affected consumer an understanding of the nature of the conduct identified, a description of how the conduct affected the consumer’s interests, and an assessment of the loss or damage for which the licensee reasonably believes the affected consumer is entitled to seek recovery”.

ACL holders must then take reasonable steps to pay the affected consumer within 30 days after an investigation is completed if the affected consumer has suffered or will suffer loss or damage (and they have a legally enforceable right to recover loss or damage from the licensee). 

While it is expected that payments will be made, the Treasury outlines that there may be circumstances where non-monetary remediation would be appropriate to accompany monetary payment. For example, this could include the rescission of a contract, and the setting aside of a portion or a whole amount of debt owed to the licensee by the affected client.

Those who fail to comply with the obligation to notify, investigate and remediate misconduct will be subject to civil penalties and criminal penalties, the latter carrying a maximum two years’ imprisonment.

“The obligation to investigate and remediate misconduct is intended to restore trust in the mortgage broking sector by encouraging licensees to proactively investigate misconduct and remediate consumers,” the explanatory materials reads.

The amendments, should they be passed, will apply to reportable situations arising on and after 1 April 2021.

The draft bill is open to consultation, with stakeholders invited to submit responses by 28 February.

The government noted that it expects to introduce the legislation in mid-2020.


Are you interested in the issues shaping the roles of mortgage and finance brokers? Don’t miss your chance to hear about all the big ideas for the year ahead, and gain the tools you need to position your business for growth and prosperity. Book your ticket to the Better Business Summit today.  

[Related: Government proposes new ACL obligations]

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Annie Kane

Annie Kane


Annie Kane is the editor of The Adviser and Mortgage Business.


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