The federal government is consulting on extending the best interests duty to all credit assistance providers – instead of just mortgage brokers – in a move to reduce conflicts of interest.
According to the new consultation on changes to responsible lending obligations, announced by government earlier this year, the government is seeking to extend the best interests duty to all credit assistance providers.
However, the government is now proposing to extend this further so it covers more than just mortgage brokers.
Instead, they are proposing that the BID be expanded to all credit assistance providers.
The new proposals outline that it will only cover credit licensees and credit representatives who provide credit assistance to a consumer in relation to a credit contract if they are a mortgage broker or if all of the following apply:
- they carry on a business of providing credit assistance in relation to credit contracts;
- they do not perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts; and
- they provide credit assistance in relation to credit contracts offered by more than one credit provider.
This could include finance brokers who also write mortgages. The proposed obligations do not apply to credit assistance provided in relation to credit for predominantly business purposes.
Notably, as the proposed requirements do not cover those who also perform or exercise the rights of a “credit provider”, it is not expected to cover bankers.
While brokers will still be expected to comply with the BID from 1 January 2021, the credit reforms propose that the extension of the best interests obligations for credit assistance providers will apply in relation to the provision of credit assistance to a consumer on or after 1 March 2021 (whether or not the assistance was sought, or commenced being provided, before that day).
The explanatory statement reads: “To ensure appropriate consumer protections remain in place, the best interests obligations already legislated for mortgage brokers [will be] extended to all credit assistance providers.”
It continued: “A best interests duty and obligation to resolve conflicts of interest in the consumer’s favour [will] apply to all credit assistance providers.”
It reads: “The extension of the best interests obligations is intended to improve outcomes for consumers by legally requiring that credit assistance providers act in the consumer’s best interests and place their consumer’s interests before their own. The extension of the best interests obligations does not affect the arrangements already legislated for mortgage brokers...
“As a result, all credit assistance providers will need to comply with the obligations in relation to credit contracts.
“The extension of the best interests obligations to licensees and their credit representatives means that those licensees and their credit representatives must:
- act in the best interests of consumers when providing credit assistance in relation to credit contracts; and
- where there is a conflict of interests, give priority to consumers in providing credit assistance in relation to credit contracts.
The government outlines a range of steps that may need to be taken in order to comply with the duty.
- prior to recommending any credit contract to a consumer based on their particular circumstances, the licensee or representative may need to “consider a range of products (including the features of those products), form a view about which products are in the consumer’s best interests and then inform the consumer of the range and the options it contains”;
- any recommendations made would be expected to be based on consumer benefits rather than benefits that may be realised by the broker. The government writes: “[A] broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer (such as the broker’s relationship with the lender), over factors and features which affect the cost of the product or are more relevant to the consumer”; and
- in cases where critical information is not obtained when inquiring about a consumer’s circumstances, the broker “could be expected to refrain from making a recommendation about a loan where there is a consequent risk that the loan will not be in the consumer’s best interests”.
The government adds: “In some situations, the consumer will not properly understand the implications of different choices, and so the broker may have to assist them to understand why a particular loan is or is not in their best interests. In some cases, this assistance may inform any recommendations provided by the broker.”
‘Principles-based standard of conduct’
Treasury has outlined that the duty to act in the best interests of the consumer in relation to credit assistance is a principles-based standard of conduct that applies across a range of activities that licensees and representatives engage in.
“As such, what conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a consumer in relation to a credit contract. The duty does not prescribe conduct that will be taken to satisfy the duty in specific circumstances. It is the responsibility of credit assistance providers to ensure that their conduct meets the standard of ‘acting in the best interests of consumers’ in the relevant circumstances.”
A maximum civil penalty of 5,000 penalty units will apply for a contravention of the BID.
In addition to the best interests duty, the law will also require credit assistance providers to resolve conflicts of interests in the consumer’s favour.
In particular, if a credit assistance provider knows or reasonably ought to know, that there is a conflict between the interests of the consumer and the interests of the credit assistance provider or a related party, the provider must give priority to the consumer’s interests.
The obligation to give priority to the consumer’s interests is not limited to conflicts of interests that the credit assistance provider currently knows about, the consultation document warns.
“Credit assistance providers are expected to take active steps to identify conflicts of interests to minimise the risk of a contravention, including obligations that can arise because of its commercial relationships with third parties,” the explanatory document reads.
“For example, if a broker has referral arrangements with a provider of goods or services such that they are an associate, then the broker would need to consider the conflicts that could arise, and ensure that they give priority to the interests of the consumer over their own interests or those of the associate.
“The obligations apply to credit assistance providers that are licensees, or their representatives.”
However, for credit representatives, the obligations only apply when they are acting within the scope of their actual or apparent authority from the licensee, and the licensee is required take reasonable steps to ensure that the representative complies with the obligations.
“What constitutes reasonable steps will vary from case to case according to the content of the obligation,” the document continues.
“Failure to take reasonable steps would include a failure to respond to or address identified problems that create a risk of a contravention; that is, licensees will need to act to prevent contraventions of the law and not simply respond to contraventions once they have happened.”
Speaking of the move, Connective group legal counsel Daniel Oh said: “Our first thoughts are that it is pleasing to see a move towards a more level playing field for brokers, with the proposed amendments looking to remove a situation where different types brokers are subject to different rules for the same product.
“What we really need now is to see further detail and guidance from ASIC on how consumer protection measures will apply to different types of brokers. Both the new best interests duty (BID) and Conflict Priority Rule (CPR) reforms were drafted from a home loan perspective, and Connective has concerns about the direct application of these rules to other areas of consumer finance which has been proposed in the consultation drafts.
“Connective will continue to work hard to ensure the broking industry and our unique challenges and working conditions are fully understood by all key stakeholders before legislation is drafted. It is absolutely critical that government and ASIC ensure a level playing field between direct channel, lender-driven regulation and indirect channel regulation, as only certain types of brokers will be subject to BID and CPR reforms as of 1 January next year.”
The consultation on the proposed extension of the BID – and several other significant changes to the Credit Act – is open until 20 November 2020.
Among the other changes proposed – aimed at reducing the time it takes for individuals and small businesses to access credit while “maintaining strong protections for vulnerable consumers” – include:
- amending the Credit Act so that responsible lending obligations only apply to small amount credit contracts (or equivalent loans) by ADIs and consumer leases beginning on 1 March 2021;
- imposing lending standards for non-ADIs, as part of the new risk-based regulatory framework for consumer credit, based on similar obligations to those imposed on ADIs; and
- amending the Credit Act to provide the Treasurer with the power to determine standards specifying requirements for a credit licensee’s systems, policies and processes in relation to certain non-bank credit conduct.
You can find all the proposed reforms via the Treasury website, here.