The corporate regulator has published its long-awaited guidance on the obligations of mortgage brokers under the newly legislated best interests duty.
The Australian Securities and Investments Commission (ASIC) has published its draft regulatory guide on best interests duty obligations imposed on mortgage brokers under the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers [2019 Measures]) Bill 2019).
- require mortgage brokers to act in the best interests of consumers; and
- address conflicted remuneration for mortgage brokers.
The regulations take effect on 1 July 2020.
ASIC’s Consultation Paper 327 Implementing the Royal Commission recommendations: Mortgage brokers and the best interests duty (CP 327) – which is open for consultation over a four-week period – contains “high-level, principles-based” guidance around the steps a broker should take to ensure compliance with the best interests duty.
The steps are structured around the gathering of information, the consideration of product options, the presentation of the options to the consumer, and the final recommendation.
ASIC proposed that mortgage brokers should “gather relevant information to ensure they can provide recommendations that will be in the consumer’s best interests”, which may involve an “iterative process of receiving instructions and making inquiries”.
The regulator acknowledged that the type and amount of information that a mortgage broker should gather to identify the consumer’s needs and objectives, and determine whether a credit contract will be in their best interests, “varies depending on the consumer’s individual circumstances”.
“We consider that this case-by-case approach reflects that the best interests duty is owed separately to each consumer,” ASIC noted.
ASIC also stressed that information-gathering obligations in compliance with responsible lending are separate to obligations under the best interests duty.
The regulator stated that the process of compliance with responsible lending may be used to demonstrate compliance with the best interests duty but that such information alone “may not be sufficient to allow a broker to determine what credit assistance would be in the consumer’s best interests”.
Assessment of products
ASIC proposes that mortgage brokers should consider products “holistically” to assess whether they are in the consumer’s best interests.
The regulator proposes that in doing so, brokers should consider:
- the cost of a product – such as interest rate, fees and charges and repayment size – is a factor that should generally be prioritised during this assessment; and
- where other non-cost considerations affect what is in the consumer’s best interests, brokers should assess whether those considerations or loan features have a realistic possibility of offering the consumer good value or a net benefit relative to other options.
The regulator added that the cost of the product should ultimately take “priority” in the broker’s consideration.
“The ultimate cost of the credit contract materially affects whether recommending that contract (as opposed to others) is in the consumer’s best interests,” ASIC noted.
“This is because the cost of the credit contract will affect the amount the consumer can borrow, as well as their ability to use funds for unrelated purposes or repay debts quicker.
“Accordingly, we consider that cost is generally a factor brokers should prioritise.”
ASIC added that a failure to “consider cost and investigate the lowest-cost options available” to the consumer “may be indicative of non-compliance”.
However, ASIC emphasised that cost “is not the only consideration” and there is an “increased risk” that the best interests duty is not being complied with “if a broker’s processes typically lead to a ‘one-size-fits-all’ outcome for consumers, even if that outcome is low cost”.
“Non-cost considerations may be relevant and beneficial for some consumers. For example, some consumers may have time-sensitive transactions and benefit from prompt decisions by credit providers,” the regulator noted.
“Other consumers may have financial circumstances that indicate that they could derive material benefit from features such as offset accounts.”
According to ASIC, non-cost considerations should present a “realistic possibility” of offering the consumer “good value or a net benefit relative to other options”.
“This is intended to make clear that presenting consumers with products on the basis of non-cost considerations which are irrelevant or detrimental to them is likely to be inconsistent with acting in their best interests,” the regulator stated.
ASIC added that if a mortgage broker cannot act in a consumer’s best interests in providing them with credit assistance, the broker “must not provide the assistance”.
ASIC proposed that mortgage brokers, where necessary, “tailor how they present product options and recommendations” to account for the consumer’s “expectations and circumstances”.
The regulator also proposed to “emphasise the educative role of mortgage brokers” and the importance of “presenting a range of options”.
“We propose to provide guidance that mortgage brokers must be satisfied that the range of products they can access and recommend is sufficient to allow them to act in consumers’ best interests,” ASIC stated.
“Additionally, we would generally expect brokers to maintain an awareness of products and features that may be available on the market.”
Following the release of the guidance, ASIC commissioner Sean Hughes said: “The obligations properly align the interests of mortgage brokers with the interests and expectations of their clients – the borrowers.
“Consumers should feel confident that their broker is offering the best loan for their circumstances, and we expect that consumer outcomes will improve as a result of this reform.”
“We have released this draft guidance for consultation as early as possible, to help promote certainty for mortgage brokers as industry prepares for the new obligations to commence in July.”
ASIC seeks public comment on the draft guidance by 20 March 2020 and intends to publish final guidance before the obligations commence on 1 July 2020.
More to come