Several members of industry have applauded the financial services regulator’s draft guidance on the incoming best interests duty for mortgage brokers, particularly welcoming its consultative approach.
On Thursday (20 February), the Australian Securities and Investments Commission (ASIC) released its long-awaited draft regulatory guide regarding the incoming best interests duty obligations for mortgage broker.
The draft guidance, which is open for consultation until 20 March, outlines what ASIC will look for when assessing compliance with the best interests obligations from 1 July 2020.
It also outlines steps brokers can take to minimise the risk of non-compliance with these provisions through “high-level, principles-based” guidance and a series of 15 scenario examples.
Several members of industry have welcomed the new guidance, stating that the first draft helps provide greater clarity of the legislation.
Speaking to The Adviser, the managing director of the Finance Brokers Association of Australia (FBAA), Peter White, said he was “pleasantly surprised” at how prescriptive ASIC had been in the draft guidance.
“I’ve been reviewing regulation in this space for about 12 years doing this, but I think this is the first time I’ve seen anything that is so prescriptive,” he said.
“While we’re still digging into the details, my initial review of the draft guidance is that it is welcome.
“I was very, very pleasantly surprised at how much detail they went into and took on some of the edgy questions that industry is going to be asking, things like: What happens if I’ve got 30 lenders on a panel, but I’m only accredited with six? What if the borrower wants a certain product yet there may be better things, or things that are more in their best interests in the market? It gives you some guidance around that. So, on my initial review of the draft guidance, I thought it was very, very good.”
Mr White added that while the four-week consultation window was relatively short and that there are always challenges to overcome when new regulation comes in, he applauded ASIC for meeting with him and other industry heads in the coming weeks to discuss the regulatory guidance.
“So, not only am I impressed with the initial look at the regulatory guide, I’m impressed with the way ASIC is going about it, and I actually think these are really, really good signs for our future…
“With this style of consultation and this level of consideration being applied to how these things are going to come out, I think [there are] some good times ahead,” Mr White added.
“I actually believe this is the stepping stone of mortgage broking hitting up to 70 to 80 per cent of market share because, all of a sudden, with the way this has been defined, it is unquestionable that brokers act in the best interests of the borrower, but a bank won’t be, as they are not governed by this. So, this puts brokers a mile ahead of the game,” he said.
The Mortgage & Finance Association of Australia has not yet issued a statement regarding the draft guidance, but is currently hosting a series of professional development days across the country, which includes a regulatory update.
AFG and Loan Market have also commented on the draft guidance, with AFG’s general manager, industry and partnership development, Mark Hewitt, outlining that “as expected”, the guidance “focuses on the standard engagement with customers around gathering information, and the process of considering, presenting and recommending the product options in a transparent manner”.
“The transition to new laws around best interests duty for mortgage brokers is one we have been working hard on for some time,” Mr Hewitt told The Adviser.
“Our engagement with the government and the regulators over the past few years has meant we knew what the expectations would be, and we have been working to ensure we support and enable our brokers to meet the new requirements.
“That is why last year AFG took a decision to lead the market and demonstrate best practice by lifting the disclosure obligation to customers so that our brokers are ready for the legislation before it begins,” he said, highlighting that brokers now attach a one-page document to home loan documentation outlining the protocol taken.
Mr Hewitt added that the guidance also makes clear that brokers would need to be “devoting significant time to ensuring comprehensive notes of all steps taken along the path to recommending a product to a customer”.
As such, he said that the group was therefore “devoting a lot of resources to compiling and storing customer information in an easily accessible manner”.
He concluded: “We know consumers are voting with their feet and choosing to seek help from a mortgage broker. The new best interests duty is simply reflecting and formalizing what a broker does each and every day. If anything, this is an opportunity for brokers.
“The new duty makes it crystal clear that the service being provided to a consumer by a mortgage broker is, by definition, in their best interests. This is not something the lenders are legally required to do if dealing directly with that same consumer,” he noted.
“A mortgage broker’s business lives and dies by their relationships with customers. Similarly, our business hinges upon the support we provide to our brokers to help them deliver on their commitment to their customers and to keep them safe by meeting their regulatory requirements while doing so.”
Loan Market response
Sam White, executive chairman of Loan Market, also welcomed the new guidance, stating: “I’m pleased we now have a set of guiding principals to base our preparation for best interests duty from and applaud ASIC for supplying the guidelines just two weeks after the bill formally passed both houses.
“I’m also pleased that the industry will be given the opportunity to continue to work with ASIC and provide feedback.
“From an initial reading of the ASIC consultation paper, I’m more confident than ever that Loan Market is on the right path to keep our brokers safe, save them time and help them wow their customers,” he said.
Mr White outlined that the group had introduced a new process, “The Loan Market Way”, that helps brokers map the core elements of the best interests duty by harnessing “industry-leading technology and providing a seamless customer experience”.
He continued: “As I’ve always said, there is no doubt in my mind that the vast majority of brokers are operating in the best interests of their customers already, and I believe that the DNA of brokers will not change under this new law, but rather our processes – as an industry and as individuals – will need to be more comprehensive and transparent.
“I believe broker share will grow, given brokers now have a legal obligation to act in their clients’ best interests, compared with lenders who simply do not,” Mr White said.
“As the broker share grows, the key issue facing brokers will be why customers choose a particular broker over another.
“In my mind, that will come down to the individual customer experience – and that is why we have built The Loan Market Way,” he said.