Association heads have welcomed the passage of the best interests duty through Parliament but outlined that further guidance and clarification is needed to ensure there are no unintended consequences of the new duty.
On Thursday (6 February), the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers [2019 Measures]) Bill 2019 passed both houses after being read for a third time.
The bill implements recommendations 4.7 and 4.2 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by amending the National Consumer Credit Protection Act 2009 (Credit Act) and the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (TCP Act).
The obligations apply in relation to credit assistance provided by mortgage brokers in relation to any credit contract and will:
- require mortgage brokers to act in the best interests of consumers; and
- address conflicted remuneration for mortgage brokers.
While several industry heads have told The Adviser that they welcome the passage of the bill, there are calls for more changes and clarifications to be made in the explanatory materials or upcoming ASIC guidance.
FBAA managing director Peter White told The Adviser that while the best interests duty was to be welcomed generally, he still had some concerns with the bill itself.
Mr White told The Adviser: “I was actually quite concerned with the speed at which it moved from the House [of Representatives] and out the other end of the Senate...
“I must admit I was a bit disappointed with the final bill, as there was an enormous amount of work that was done last year, and right up to the last few days before Christmas, with Treasury and the government on the explanatory memorandum and the bill.
“We had asked for several changes to the bill, and I think only about 20 per cent of those were made. So, there’s a fair bit of disappointment with that.”
According to Mr White, the four main points the FBAA wanted changing included:
- changing the duty application from “mortgage broker” to an activities-based test so that it applies to any broker that writes a mortgage;
- a greater definition and clarity around business lending to ensure that small-business lending isn’t captured;
- mortgage managers not being exempt from the duty when they are acting as a lender; and,
- greater clarity around when the duty applies to “bundled” credit products.
Mr White told The Adviser: “I think the greatest failure within the best interests test is that the the test is applied to the business, not the activity. That is a fundamentally serious mistake and, I dare say, will create issues and potential action in the future because it creates an uneven playing field.
“Currently, the duty applies to mortgage brokers, not mortgage products,” he explained.
“So, if you are predominantly a mortgage broker (but also write car loans, personal loans etc.), you will be held to the best interests duty. But if you are predominantly a finance broker (but also write the odd mortgage), you won’t. Because they aren’t defined as a mortgage broker under the definitions in the bill.
“However, if it were based on the activity (writing a home loan), then all brokers would be caught under the duty, but the current wording means that there are a whole lot of brokers out there that are not caught under it. So, I’m very disappointed with that,” he said.
Mr White noted that some brokers had expressed dismay at the inclusion of the clawback period being limited to two years, but suggested that “conversations on clawbacks are still a long way from over”.
“As far as brokers being charged a clawback, we are still very strong on fighting against that,” he said.
In an update to members, MFAA CEO Mike Felton welcomed the passage of the legislation, following more than 12 months of “intense consultation and dialogue” with government.
Stating that the duty is a “positive measure which focuses on protecting consumer outcomes, aligns the law to customer expectations and provides a significant opportunity to further differentiate the value that mortgage brokers provide”, Mr Felton noted that the legislation has retained upfront and trail with “appropriate adjustments to mitigate conflicts and ensure sustainability, thereby protecting competition, choice and access to credit, which is an exceptionally good outcome”.
However, he added that “there are still outstanding issues which are yet to be remedied”, including: the requirement for mortgage brokers to be held to a BID on standalone non-mortgage credit (e.g. car finance) as they are “unlikely to have the lender coverage or systems capability to be able to meet [it]” and a lack of clarity on various aspects of the overall BID obligations and how they are to be interpreted and applied.
Mr Felton suggested that there could still be a “number of further adjustments to the regulations and explanatory statement which are yet to be released in final form”.
The MFAA CEO said the government “has committed to continue working with industry and stakeholders as the regulatory guidance is progressed by ASIC”.
“We look forward to having further discussions with government, Treasury and ASIC in the coming weeks to obtain greater clarity on these issues and to finding appropriate solutions that achieve the intended consumer benefit, without causing unintended consequences which may ultimately impact on competition or brokers’ ability to actually serve those customers.”
Several aggregator heads have also outlined their thoughts on the best interests duty, as per the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers [2019 Measures]) Bill 2019, which you can read here.
[Related: Best Interests Duty Bill formally passed]